BLACK SEA BLOG: The real danger of Romania's monster IMF loan

By bne IntelliNews March 20, 2009

Bogdan Preda in Bucharest -

Romania's recent memories of the International Monetary Fund (IMF) are grim, marred as the relationship was by the strict adherence to too many rules and resulting social unrest. In fact, shortly after it joined the EU at the start of 2007, Romanian authorities were so keen to close their last accord with the IMF that they proudly proclaimed the country no longer needed it because meeting the EU accession criteria had made its role in Romania's affairs redundant.

That claim was a tad too hasty as the latest evidence shows: the IMF is back and ready to oversee the granting of a loan of up to €20bn, the biggest ever granted to the country, and Romania can't afford to refuse the offer.

Romania, like other new EU entrants seeking financial aid these days, isn't to blame for the global financial crisis; it's merely one of its victims. Romania and its brethren are the countries into which international banks and companies, mainly from Western Europe, poured in tens of billions of euros, funds which could now fast disappear if these economies collapse in the tailwind of the crisis. And last but not least, they are the recipients of large amounts of EU aid, paid for by European taxpayers. So letting them die would mean even bigger losses than those seen so far worldwide.

When Romania asked the EU for a loan package in January to help it cope with the effects of the global crisis, the European Commission said it didn't have enough money left to help, President Traian Basescu said in an in interview with Realitatea TV on March 17. That's why the IMF was again asked to step in with a monster loan, along with more money from the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank.

The reasons for the two-year planned loan, which has yet to be confirmed by the IMF, are quite clear: two-thirds of the money is needed for the central bank to support the currency, while another third will go to help finance the budget deficit as well as revive lending and investments, according to Prime Minister Emil Boc. Romania is entitled to pull chunks from the loan on a quarterly basis over a period of two years, with a two-year repayment break followed by repayment of the interest and later of the principle, over a period of another five to six years.

Of course, Romanian authorities are hoping for some global economic miracle that would mean they don't have to borrow the whole €20bn. But the country's finances are turning out to be worse than anyone could have predicted a year ago, so the country has no chance of even starting to pull out of the crisis before the end of 2010, reckons President Basescu. In short, according to news reports citing Mihai Tanasescu, Romania's representative at the IMF, the Fund forecasts that Romania will see its economy shrink by 3-4% this year, after enjoying nine consecutive years of economic expansion, while its budget deficit will exceed 4% of GDP, beyond the Maastricht convergence rules for EU member countries.

Money will come in, so what's the problem?

The real problem though is not necessarily that the IMF is back in town or that Romanians will have the burden of paying back the loan over the next few years. No, the real issue is whether the IMF and the EU will have enough leverage over the country's present and future leaders to make the loan work.

The worse that could happen would be for Romania to cash in on the loan, but not implement the much-needed policies that would presumably help it avoid financial disaster. And then make its citizens repay the loan with their taxes. Without enough monitoring from the European Commission, the IMF and the World Bank, that's very likely to happen and there's enough evidence out there proving that. Why would anyone believe that the Romanian authorities are capable of using the money from that one-third of the loan aimed at reviving the economy and financing the budget deficit properly, if evidence over the past few years shows previous governments failing to absorb EU funds that were available for free?

There are already reports that the government intends to use money from the loan to boost the capital of CEC Bank and Eximbank, the country's two remaining state-owned banks, in order to revive lending. Evidence over the past two decades shows that once politicians install their people on the boards of state-owned banks, those banks sooner or later become personal piggybanks rather than appropriate instruments genuinely aimed at reinforcing the economy.

No matter how good a job the National Bank of Romania, currently headed by Governor Mugur Isarescu, would do to protect the leu from sharp swings, its efforts would be in vain without enough support on the government's part. Right now, Romania has a compromise government made of a loose alliance of the country's two biggest parties, which publicly hated each other until recently. There's the Democrat Liberals backing President Basescu and the Social Democrats who are criticizing him. The only reason preventing this fragile political order from falling apart is that both parties are using their governmental seats in order to capitalize on opportunities ahead of the presidential elections due at the end of this year.

Food for thought

The risks associated with this IMF loan are huge for both the lenders and the borrowers. The EU and the IMF must be more determined than ever before to keep the Romanian authorities to following the rules of the agreement or else watch Romania turn into a financial black hole.

At stake there's more than just the failure to preserve living standards and help the country return to an investment-grade rating. Failure to implement a sound economic programme associated with the two-year lending package could plunge Romania into an economic contraction, mass unemployment and rising inflation. All of these would take another decade to overcome and will definitely thwart the country's plans to adopt the euro and even question its quality as a member of the EU.

Romania, more than ever before, has to show enough willingness to use the EU funds it has so far failed to absorb. These funds could be used to create jobs from the much-needed large infrastructure projects that haven't been started. Failure to do so would result in the worst drop in living standards since the fall of Nicolae Ceausescu's communist dictatorship in 1989, when basic food and gasoline were rationalized and Romanians froze in their apartments. That happened as a consequence of Ceausescu's decision to step up repayment of the foreign loans he had used to build inefficient factories, palaces and other large-scale projects that produced little return when compared with the cost of developing them.

That crisis and the shortages of basic items for almost a decade happened almost a generation ago, but such memories are still fresh in the minds of many Romanians who took to the streets to topple the regime. 20 years since the fall of communism, the average Romanian who ousted communism hoping for a better life may soon feel betrayed and come to ask himself what the free market economy really is about. And it'll be hard to blame them.

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BLACK SEA BLOG: The real danger of Romania's monster IMF loan

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