Tuesday, November 2, 2010

Romania Agrees to Terms for Next International Loans

Nov. 1 (Bloomberg) -- Romania agreed to terms that may release 2.4 billion euros ($3.3 billion) of bailout loans from the European Union, International Monetary Fund and World Bank as it seeks to recover from the deepest recession on record.

The funds will be released if Romania approves a 2011 budget, enacts a unified wage law and revises consumer-credit and pension rules, the lenders said today in Bucharest, the Romanian capital.

The east European country is counting on 20 billion euros of loans to stay afloat after the recession slashed budget revenue. The government cut wages for state workers by 25 percent and raised the value-added tax by 5 percentage points to meet budget deficit targets and qualify for the loans.

“Results have been good so far,” Jeffrey Franks, head of the IMF mission to Romania, told reporters after a two-week review of the loan program. “We have reached an agreement at staff level. After the conditions are fulfilled, we could request the board’s approval” to make the next payment by mid- January, he said.

The leu fell 0.4 percent to 4.2834 as of 5:05 p.m. in Bucharest.

The EU may release a 1.2 billion-euro payment in late February or early March, said Istvan Szekely, head of the European Commission’s mission in Romania. The IMF said its tranche would be 900 million euros.

World Bank

The World Bank may release a 300 million-euro loan installment by year-end if the conditions are met, mission chief Sudharsan Canagarajah said in an interview. The lender may also consider guaranteeing a bond issue if the government needs additional financing, Canagarajah said.

Romania has pledged to reduce its budget deficit to 6.8 percent of gross domestic product this year and 4.4 percent in 2011. The deficit widened to 7.2 percent gap last year as gross domestic product shrank 7.1 percent.

Romania’s economy contracted in the third quarter because of the wage cuts and higher VAT, which took effect in July, Franks said. GDP growth may be “perhaps slightly positive” in the fourth quarter and “certainly” expand in the first and second three-month periods in 2011, he said.

Consumer Credit

The IMF is requesting changes to a proposed consumer-credit law that aims to reduce fees on loans, helping consumers reduce their monthly payments. While Romania was responding to an EU directive, the government went further than requested and extended it to 8 million existing credit contracts as well as new loans.

The legislation may cause losses at financial institutions and threatens financial stability, Franks said. Romania risks an EU infringement procedure over the bill, Szekely said.

The IMF expects Romania’s economy to contract for a second year in a row this year, shrinking as much as 2 percent, compared with an Aug. 4 forecast of 1.9 percent, Franks said. The 2011 outlook for 1.5 percent growth is unchanged.

Inflation, the central bank’s main target, will accelerate to more than 8 percent by the end of the year, from 7.8 percent in September, because of the VAT increase, the IMF said. The Romanian central bank sees the rate at 7.8 percent in December and 3.1 percent by the end of 2011.

‘Broadly Appropriate’

Romanian monetary policy is “broadly appropriate,” Franks said in an interview in Bucharest. The central bank has room to lower its benchmark interest-rate, which currently stands at a record low 6.25 percent, if inflation slows as the effects of the VAT increase dissipate next year, he said.

“The central bank has made a decision to pause its easing cycle until we see how the effects of the value-added tax increase and other things like food prices play their way out through the economy,” he said. “If inflation begins to come down, then there may be room in the future for additional interest-rate easing. But we’ll have to see how much second- round effects are happening on the inflation front.”

Policy makers will probably leave the key rate unchanged at a meeting tomorrow as they assess the impact of the VAT increase on inflation, according to the median estimate of seven economists surveyed by Bloomberg.

--Editors: Alan Crosby, Willy Morris

To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.

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

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