Tuesday, November 2, 2010

Romania to Get Next Installment of Bailout

By REUTERS

BUCHAREST — International lenders agreed on Monday to release the next tranche of loans due under Romania’s international bailout program, easing concerns about the recession-hit country’s finances.

Bucharest has slashed public sector wages and hiked value added sales taxes to try to cut its budget gap to 6.8 percent of gross domestic product this year, in compliance with the terms of the €20 billion, or $27.9 billion, deal led by the International Monetary Fund.

The I.M.F.’s Romania mission chief Jeffrey Franks said Romania was on track to reach that target. He said an agreement had been reached at staff level to disburse the next tranche, though wage pressures continued to pose a threat.

Fiscal “targets for end-September have mostly been reached,” Mr. Franks told a news conference.

“We still need to see some additional progress,” he said, citing the approval of the second round of public sector wage legislation and the enactment of the pension law.

The leu traded slightly softer at 4.277 per euro after confirmation of the Fund’s next €900 million payment, which followed completion of an I.M.F. review. The European Commission is in turn expected to disburse a further €1.15 billion.

“The decision was priced in by markets,” said Ionut Dumitru of Raiffeisen Bank in Bucharest. “We would have seen an impact if an agreement was not reached and things derailed.”

Funds are flowing back into many parts of central Europe but investors remain wary about Romania due to its rocky politics. The fragile coalition government has narrowly survived two no-confidence motions in just 10 months.

Romania needs the cash to help plug a fiscal gap caused in part by its refusal to pay investors more than 7 percent interest on its debt, raising the prospect of a funding crunch this month.

The European Commission confirmed previous forecasts for the economy to contract about 2 percent this year but then resume growth of about 1.5 percent in 2011.

Last year’s budget deficit was 7.2 percent of G.D.P.

If Romania approves its 2011 budget late in December, the I.M.F. would hold its board meeting to rubber stamp the disbursement of funds in early January to give Bucharest enough time to pull together sound policies, Mr. Franks said.

Mr. Franks said the Washington-based lender will hold full negotiations on another I.M.F.-led aid agreement during a mission early next year. He also said the Fund had advised Bucharest to maintain current fiscal policy for another year or two.

“Constant changes to tax policies are difficult to incorporate into a stable fiscal policy,” Mr. Franks said. “We advise you not to make significant changes” for at least the next one or two years.

Parliament has voted in favor of cutting value-added tax on staple foods, but lawmakers have said they did so in error, and the I.M.F. expects President Traian Basescu to overturn the measure.

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