Romania faces year-end liquidity crunch as IMF says no

Graham Stack in Bucharest for Business New Europe (www.businessneweurope.eu)

With the third tranche of IMF funding for Romania on hold until a new government is in place and willing to meet IMF criteria, Romania will have to turn to the domestic market to fund outstanding expenditure in 2009. Analysts anticipate a resulting liquidity drain that will stall recovery.

As anticipated, the collapse of Romania’s grand coalition government October 13 in the run-up to tightly-contested presidential elections November 22 has made it impossible for the IMF to disburse the third, 1.5bn euro tranche of a 20bn euro stand-by loan agreed in April. An additional 1bn euro tranche of financial support from the EC was also tied in to IMF approval.

“(I)n the current political environment crucial components of the policy package cannot yet be implemented. Most important, the interim government cannot legally submit the 2010 budget to parliament, nor can it undertake the actions needed to trim the 2010 deficit to the 5.9 percent of GDP deficit target. The Fiscal Responsibility Law and Pension Reform cannot yet be agreed and approved by parliament,” was the IMF’s official description of the situation November 6.

With the budget deficit likely to hit over 8% of GDP by year end, adviser to Central Bank governor Adrian Vasilescu was quoted by media as saying that the government needs 5bn euros by year end.

This puts Romania in a catch-22 situation. With the presidential elections likely to go into a second round December 6, no party is going to take responsibility for the cuts needed to downsize the budget. But the failure to countenance these cuts means that the main anticipated source of funding spending – IMF et al – has been lost. And the only alternative –expensive government borrowing on the domestic market – will drain liquidity that should be restarting the economy, thus prolonging the recession.

“Printing money is out of the question without a foreign exchange cover,” says Melania Hancila, chief economist at Volksbank Romania, “therefore the only financing resource remains for the moment the domestic market, however the cost of borrowing will be significantly higher, probably double, inducing an extra burden on Romania’s debt service. The public sector will drain up the excess liquidity in the banking system, leaving scarce financing available for the private sector, further delaying the recovery of the real economy.”

“Even if we got the money from IMF/EU, says Nicolaie Alexandru, chief economist at ING Romania, “it would have been still difficult to finance the budget deficit as those amounts were unlikely to cover liquidity needs during these two months.”

“It is going to be a tough job,” Alexandru predicts, agreeing with the figure of 5bn euros funding requirements for November and December. “It might be that the Ministry of Finance pays more than a maximum of 10% for RON securities before the end of this year, but even this would not suffice. The rest of the spending is likely to be delayed with arrears and the pressure on the 2010 budget is to increase.”

“Clearly pressure on yields will grow, as issuance needs rise, says Pasquale Diana of Morgen Stanley. “Also, there will be pressures on the RON to weaken, the NBR will be active in the foreign exchange market, market rates will go up and the easing cycle will stall indefinitely.”

Killing with kindness?

As the crisis struck Eastern Europe, and the IMF re-entered the scene like a blast from the past, the institution was keen to reassure populations and show that it had taken on board criticism of policies in the 1990s. Notoriously, former World Bank deputy head and Nobel Prize holder Joseph Stiglitz lashed the IMF for imposing too harsh austerity measures on borrowers during the Asian crisis 1997, thus prolonging the crisis and provoking political instability.

This time round, the IMF has done the opposite: directly financing budget deficits, despite its articles limiting its remit to balance of payment crises. One third of Romania’s IMF money is assigned to finance the deficit.

Critics are now arguing the IMF could have got more reform for its money.

With IMF programmes going off-track in both Romania and Ukraine, where wide-open presidential races are fuelling populist politics, accusations are being made that the IMF has encouraged moral hazard in the form of expansionist budgets that will prolong the recession as surely as sweeping austerity measures.

“The IMF has not been tough on Romania, quite the opposite,” argues Morgan Stanley’s Diana.

“The institution increased moral hazard here,” says Alexandru, “and it is likely to face very strong opposition to any harsh measures it may try to impose on Romania early next year – as these unsympathetic measures are unavoidable given no real reform measures were implemented so far and the fiscal imbalance is growing in Romania.”

The argument for both Romania and Ukraine is that governments when applying for IMF aid were ready to make more commitments than the IMF demanded from them. When the IMF went for conditionality–lite, and as elections dates approach, local politicians lost their fear of the institution, and thought they could take it for a ride, reneging on budget deficit targets and other reform measures promised. In both Ukraine and Romania, the IMF has now quit the game, but not before the damage has been done – in anticipation of IMF funding, budgets deficits are huge, and will lead to downwards pressure on the currency, drying up of domestic liquidity and payment arrears, in the worst case printing money.

This is also of course linked to the specifics of the political process in both Romania and Ukraine. In both countries, there is no majority in parliament, and both countries are going into presidential elections – Romania in November, Ukraine in January, – that polls show are wide open. Because no top politician in either country can be sure of being in office a few months from now, there is no reason to take responsibility for the situation. But whoever gets in, is going to have to deal with the mess, and cuts will then be harsher than if they had been implemented earlier.

“Therefore, the recession is likely to be longer than we expected and tighter fiscal policies might have a bigger negative impact on growth for three to four years from now. If there is no recovery in 2010, things could become even more complicated,” concludes Alexandru gloomily.

Twenty years on, Romanian democracy works, warts and all

Graham Stack in Bucharest for business new europe (www.businessneweurope.eu)

Romanian democracy may not be beautiful, but it works. As the world celebrates 20 years of the fall of the wall, memories of Romania’s bloody 1989 revolution serve in Bucharest for electioneering mud-slinging rather than serious reflection. But this just points to yet another neck-and-neck presidential race: no Romanian president has yet won reelection for a successive term, and this time round may be no exception.

Even the joyous celebrations in Berlin November 9th to mark 20 years since the fall of the wall were occasion for mudslinging rather than national consolidation in Romania’s hard-fought presidential elections, the first round of which will take place November 22. Incumbent president Traian Basescu, a centre-right candidate backed by the Liberal Democrat Party (PDL), traveled to Berlin to take part in the festivities, accompanied by a 20 year old student whose mother had been killed by state security forces during Romania’s violent overthrow of the Nicolae Ceausescu regime six weeks after the fall of the wall 1989.

For all the celebrations, it is often overlooked that the consolidation of democracy in Eastern Europe paradoxically owes a lot to the successor parties of the former national Communist Parties. In most countries, the “former Communist Party”, turned into social democrats, has frequently governed, and when not in government, has been a powerful opposition. Despite the horrors of Ceausescu’s regime, as evoked by this year’s literature Nobel Prize winner Herta Müller, for ten out of Romania’s twenty years of democracy, the president was Ion Iliescu, a former top ranking Communist party official under Ceausescu whose role in the violence December 1989, and the summary execution of has never been properly cleared. It was however former Communist top dog Iliescu, with the support of his Communist-successor Party of Democratic Socialism, who took Romania into NATO and paved the way for EU membership.

Iliescu was removed from the leadership of the Communist-succesor party Party of Democratic Socialism (PSD) in 2004, but still acts as its elder statesman.

So when Basescu reminded in Berlin that Romanian leaders immediately following Ceasescu’s execution – meaning none other than Iliescu – had used violence against protestors they defamed as terrorists, resulting in total loss of life of 1600, everyone understood this to be simply an electioneering dig, rather than a call for real investigation of what happened twenty years ago. Iliescu simply responded as good as he got, calling Basescu a profiteer of the old regime and of the new one, someone who had not even participated in the revolution, whereas Iliescu claimed to have taken both risks and responsibility.

And underlying how the PSD has, at least superficially, morphed into a social democratic party, its presidential candidate this time round, Mircea Geoana, is a cosmopolitan former diplomat with degrees from Paris National School of Administration and Harvard Business School, and became Romania’s ambassador to US in 1997 at the age of 39. In 2005 he ousted Iliescu from the leadership of the PSD in a surprise vote.

This means that the PSD presidential candidate this time round suddenly looking more modern and European than former ship’s captain Basescu. And attempts to use the memory of the bloodshed twenty years ago won’t cut ice with Romanian voters.

“The 1989 “Revolution” is still a controversial topic in Romania. Twenty years after the collapse of Ceausescu’s regime, Romanians’ agenda is filled with issues related to the current economic crisis – unemployment, wages, pensions etc; the events from December 1989, unfortunately, are not a major concern for most Romanians,” Catalin Augustin Stoica, pollster and director of the Centre of Urban and Regional Sociology (CURS) tells bne. “I personally do not think that the topic will play a major role in this campaign.”

“The PSD is today treated just as any other political party,” agrees Professor Adrian Pop of Romania’s National School of Political and Administrative Studies.

Neck and neck

Before the current economic crisis broke over Romania, President Basescu was looking a dead cert to win reelection, possibly even at the first round with over 50% of the votes. But with the crisis set to reduce Romania’s GDP by a whopping 8% this year, and Geoana a plausible anti-crisis candidate, the opposition is fast making gains. Now a second round of voting looks certain for December 6, with Basescu and Geoana going through ahead of Crin Antonescu of the National Liberal Party (PNL). Opinion polls for the first round put Basescu at 30-35%, Geoana at 25-30% and Antonescu at 20-25%.

What happens then is anyone’s guess. Polls show the second round to be neck and neck, with Basescu and Geoana both hovering around 50%.

“Answers to poll questions about the second round should be taken with a grain of salt,” says Stoica. “Against the backdrop of a tense and
controversial campaign, it is too early to predict how voters will react
in the runoff election. I expect that the campaign for the second round will be very tough, with tons of innuendo, false accusations, rumors, personal attacks.”

Among the complicating factors is that the media are generally believed to have a bias against Basescu as a result of historic ties between some of Romania’s TV moguls, such as Adrian Sarbu and Dan Voiculescu, and the PSD. On the other hand, according to Dan Sultanescu of infopolitic, Basescu’s image has always been that of the lone outsider taking on the powers that be, so media opposition could also work to his advantage.

Moreover, Basescu has incorporated a referendum on abolition of the upper house of parliament and reduction of lower house MPs into the first round of voting November 22. The parliament is the institution Romanians trust least, suspecting it not without cause it to be a pit of sleaze and pork-barreling, and the move against it is popular, supported by 75% of voters. The referendum is not binding, but it will highlight again Basescu’s image as fighter against deep-rooted corruption and cronyism, compared to Geoana who is chairman of the upper house.

“The referendum on a unicameral parliament could affect the elections by favoring Basescu,” believes Pop. “Basesecu is in favor of a presidential republic; Geoana and Antonescu prefer a parliamentary republic.”

The combination of a close-run race and mutual smearing means that Romania’s electoral system could be in for its toughest time yet. “The Romanian electoral system is pretty fair, but a more or less disputed election can’t be ruled out,” says Pop.

“I do not think that the Romanian electoral system is strong enough to
avoid controversy,” agrees Stoica. “PNL and PSD have already started accusing PDL of attempting to “steal” the elections. One can only imagine what would happen after the first round.”

Romania’s budget needs revising as IMF aid looms

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)
Hardly a week has passed since Romanian President Traian Basescu signed into law the budget for 2009. But with news emerging March 2 that the government has started preliminary talks with the International Monetary Fund on an aid deal to help patch up the country’s strained finances, the budget is already in urgent need of revision.

Passing the 2009 budget was difficult enough. A hard-fought, high-spending election year in 2008 – which saw salaries for teachers hiked by 50% in November, weeks before parliamentary elections – left Romania ill prepared for the belt-tightening needed in the wake of the financial crisis that impacted in the last quarter of 2008.

However, a new broom belonging to Prime Minister Emil Boc, only sworn in on December 15, pushed through a crisis budget that bravely slashed the budget deficit to 2% from 5% in 2008, and froze public sector wage growth. This, despite the fact his government depends on a coalition between his own Democratic Liberal Party (PD-L) and their traditional bitter rivals, the leftist Social Democratic Party (PSD).

But less than a week after President Basescu signed the budget into law, a growing chorus is saying that the underlying growth forecast of 2.5%, and consequently the planned budget deficit of 2%, is wildly unrealistic. “The target for the budget deficit becomes unrealistic under our assumptions of a 3.5% GDP contraction in 2009, as this will have a very strong impact on revenues. Our forecast is for a 7.3% GDP deficit,” Nicolaie Alexandru-Chidesciuc, senior economist at ING Bank Romania, tells bne. “Any target below 5% of GDP would require additional cuts in spending and/or hikes in taxes.”

The rating agency Standard and Poor’s, which in October sensationally downgraded Romanian debt to junk status, also predicted on March 2 that the budget deficit would reach 5.0-6.2%. Such gloomy prognoses are backed by January’s economic data, which showed several main budget revenue items falling 8% in January on the year in nominal terms as the global crisis took its toll on the domestic economy. The budget that President Basescu signed into law on February 25 envisages 18% growth in revenue in 2009.

Romania’s budget problems are, however, not only the result of the global economic crisis, but are also homemade. Recent years’ stellar economic growth went hand in hand with weakening budget discipline, which is now coming home to roost. “Government spending doubled between 2005 and 2008, and the public sector wage bill nearly tripled over these three years due to high wage increases combined with a large increase in government employment,” an IMF mission to Romania said in a statement on February 4, a point tacitly admitted by the prime minister.

“It’s a shame that we failed to capitalise on economic growth, to set aside some money for a more difficult year,” PM Boc lamented in February.

IMF medicine political poison for coalition

With financial markets effectively closed, yawning capital account and budget deficits together with a banking system threatened by foreign-denominated loans and a depreciating leu mean that Romania has now been forced to look for emergency funding sources.

First up is the EU with which Romania is conducting official negotiations for financial support. But Romanian officials confirmed to newswires March 2 that a team led by the central bank’s deputy-governor, Cristian Popa, had been dispatched to Washington for preliminary talks with the IMF.

The IMF already stated February 4 that it would require Romania’s budget deficit to be further reduced before disbursing any loans. But Romania, like troubled neighbour Ukraine, is now embroiled in the run-up to presidential elections in late 2009, meaning it is a bad time for swingeing budget cuts. PM Boc is a party colleague of President Basescu, who is up for re-election in December.

At the same time, the PD-L’s coalition partner is its traditional foe, the leftist PDS, which took the largest share of the vote in November’s elections. The PDS, with ties to organized labour, will be even more allergic to cuts in state spending. “Given Romania’s history of poor industrial relations, the government may struggle to impose budget cuts in practice, which suggests a somewhat strained outlook for relations with the IMF,” reckons Royal Bank of Scotland’s head CEE analyst Timothy Ash.

Boc is still fighting shy of the IMF, arguing that 20% of budget expenditure slated for 2009 is infrastructural investment that will stimulate the economy. He insisted March 2 that the only official talks Romania is engaged in are with the EU. But many analysts see an IMF agreement as inevitable for Romania, given the capital account and budget deficits that resemble those of the new IMF-debtor nations Latvia, Ukraine and Hungary.

ING’s Alexandru-Chidesciuc suggests a compromise could eventually be found, with some required spending cuts deferred to 2010. “I think the IMF would accept a budget deficit probably even slightly higher than 3% of GDP this year,” he says. “It will concentrate on a programme aiming gradual and sustainable correction of the budget deficit. This would imply a much lower budget deficit in 2010, but I don’t believe the IMF will ask for a budget surplus even in 2010.”

Sting in Serpent Island tale leads to political strife in Romania

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)

When the International Court in the Hague awarded the lion’s share of the hydrocarbon rich northwestern Black Sea to Romania over Ukraine, many in the Latin county saw this as poetic justice for disrupted gas supplies in January. But Romania’s politicians have again showed their mastery of snatching defeat from the jaws of victory

Maritime border disputes are usually mind-bogglingly arcane affairs. So it was with the decade old dispute between Romania and Ukraine over maritime border delimitation in the North-Western Black Sea. The main bone of contention was an ‘insular feature’ known poetically as Serpent’s Island, the size of a few football pitches, and located not far off Romania’s Danube delta. Ukraine is the proud sovereign of what it claimed was a fully fledged island, replete with a Potemkin village of settlers – and entitled to a zone of exclusion giving Ukraine control over resource-rich seabed.

Romania was intent on calling a rock a rock, denying Serpent Island was an island, and thus arguing it had no implications for the maritime boundary.

However arcane the arguments, at stake was sovereignty over an estimated potential 70bn cubic meters of natural gas – enough to supply Romania’s entire gas needs for five years – and 12m tonnes of oil.

The significance of these reputed riches was greatly heightened by January’s gas dispute between Russia and Ukraine, which saw supplies to Europe, including Romania, severely disrupted. Both sides claimed the resources could limit dependency on imported gas.

After years of deliberations, the International Court of Justice in the Hague reached a decision February 3 – and awarded the four fifths of the disputed area question to Romania. 9,730 square kilometres of the continental shelf of the Black Sea.

Ironically the entire rock / island issue turned out to be a red herring. “The ICJ decided that it was not necessary to determine whether Serpent’s Island is a rock or an island in order to delimit the maritime boundary,” says Martin Pratt of Durham University’s International Boundary Research Unit.

Ukraine put a brave face on yet another international setback, while Romania celebrated, with President Traian Basescu calling it a “big success for Romanian foreign policy”. Prime Minister Emil Boc immediately promoted Romanian representative at the ICJ, Bogdan Aurescu, to a senior post in Romania’s Ministry of Foreign affairs. And commentators pointed to the poetic justice of the award after Ukraine’s spat with Russia had cut off gas supplies to Romania in January. And the even more enthusiastic called it a victory for Western civilization, with the NATO and EU border shifting to its easternmost point.

A sting in the tale

But the Serpent Island tale quickly proved to have a sting to it.

On the day after the celebrations, the hangover set in. It transpired that two weeks before the November 30 2008 elections that voted out the government led by Calin Tariceanu of the National Liberal Party (PNL), a cabinet resolution had granted a production-sharing concession for blocks in the Serpent Island area to Sterling Resources Ltd, a little-known Canadian firm. The agreement, some annexes of which were classified secret, had apparently awarded Sterling Resources production rights in addition to existing exploration rights, in the event that ICJ ruled in Romania’s favour.

The government’s reactions was immediate, with new Democratic Liberal PM Emil Boc dismissing the head of the National Agency for Mineral Resources (ANRM), Bogdan Gabudeanu, Romania’s natural resource regulator, on the same day.

Romanian investigative reporters quickly claimed murky ties existed between ueber-oligarch Dinu Patriciu, head of Romania’s largest energy company Rompetrol, and regarded as sponsor of Tariceanu’s PNL, Sterling Petroleum, other foreign concession holders, and sundry officials.

Apart from Gabudeanu, attention is focusing on current Environment Secretary, former head of the prime minister’s chancellery, Doru Badulescu. It was Badulescu and Gabudeanu who signed off on the concession agreement. Question marks also hang over the role of former justice minister Catalin Predoiu.

Of course, with the economic situation for Romania in 2009 looking increasingly grim, PM Emil Boc is keen on blackening the name of his predecessor, adding fuel to the fire. For his part, former PM Tariceanu has said he will sue Boc over publicly-made corruption allegations.

Sterling Resources says that all relevant ministries signed and approved the resolution. “The Eleventh Amendment took over 20 months to be approved and followed the approving process by the line ministries, as provided by the existing regulations, until final approval by the Government on November 12, 2008,” the Canada-listed company said in a statement denying all allegations. The company admits however that the November 12 agreement “transfers greater control and decision-making to the operator”.

Dinu Patriciu for his part also denied the allegations in a Rompetrol statement, and is dismissive of the Black Sea resources as a whole, adding his voice to that of other experts in saying that the potential reserves are over-stated and the costs prohibitive.

This week is likely to see the scandal continue to roll, as the government has now ordered the disclosure of the secret annexes to the agreements.

Whatever the truth of the affair, it bodes ill for Romania’s corruption-dogged relations with the EU that have led to suspension of billions of euros of structural subsidies.

The EU called on Romania February 12 in its biannual review of corruption and judiciary to “regain momentum on judicial reform and the fight against corruption so as to reverse certain backward movements of recent months.” The EU pointed to parliamentary obstructionism in hindering anti-corruption measures. Victor Alistar, executive director for Romania of corruption watchdogs Transparency International Romania, backed up the EU’s findings, saying that in Romania “the air is thick with corruption.”

Romanians will be worrying lest their courtroom victory over Ukraine, at least in the short term, costs more EU subsidies than it produces gas and oil revenues.