Thursday, September 23, 2010

Romania Gets $1.6 Billion Payment to Support Deficit as Program `On Track'

Romania received a 1.2 billion-euro ($1.6 billion) loan payment from the European Union today as the bloc said a “much-needed fiscal adjustment is in place” and the country is making progress on its bailout agreement.

The money will help finance Romania’s budget deficit as it struggles to sell debt on the domestic market. The payment came after Romania streamlined its pension system and raised the retirement age to 65 to comply with terms of a 20 billion-euro aid package led by the International Monetary Fund.

The EU and IMF “are happy about what happened under the program, and it’s definitely on track,’’ Laurent Moulin, the bloc’s mission chief in Bucharest, said today. “It’s fair to say a lot of positive things have been done. This program is on track, and the much-needed fiscal adjustment is in place.”

Romania, mired in its worst recession on record, also cut wages for government workers by 25 percent and increased the value-added tax by 5 percentage points to help rein in its budget deficit. Prime Minister Emil Boc faces a confidence vote over the austerity measures next month, prompting investors to demand higher yields on the country’s debt.

Moulin also said Romania’s currency is trading in line with fundamentals after falling during the global economic crisis. The leu has dropped 14 percent against the euro over the past 24 months, the third-biggest decline among the 25 emerging-market currencies tracked by Bloomberg.

The leu “is broadly fairly valued, and I think the colleagues in the IMF share this assessment,” Moulin said at a conference in Bucharest. “The exchange rate was much better controlled than in other countries.”

Monetary Policy

Romania will ease monetary policy once the inflation rate drops to the level it was at before the VAT increase in July, Moulin said. The central bank kept its main interest rate at 6.25 percent for a second meeting Aug. 4, after cutting it by a quarter point in May.

Inflation accelerated to a two-year high of 7.6 percent in August, from 4.4 percent in June. The IMF forecasts it will slow to about 3 percent by the end of 2011.

“Romanian monetary policy will be prudently eased once inflation slows down to the levels preceding a government increase in the value-added tax,” Moulin said.

To contact the reporters on this story: Andra Timu at atimu@bloomberg.net Irina Savu in Bucharest at isavu@bloomberg.net

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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