BLACK SEA BLOG: Will banks play ball in IMF-bandaged Romania?

By bne IntelliNews May 21, 2009

Bogdan Preda in Bucharest -

In a statement rather out of character, the governor of Romania's central bank, Mugur Isarescu, called on the people to cope with the current crisis in a "non-inflamed" manner unlike the country's politicians, and rely on common sense to see them through the financial crisis. What Isarescu didn't tell Romanians, however, was whether they could expect banks to resume their lending anytime soon.

"We need to put the crisis out of our heads. We don't need to [re]discover America," Isarescu said in a speech on May 13. "It'll be enough if we look at what other countries did and come up with solutions and policies that were already implemented there. The rest is just noise."

Isarescu didn't elaborate on what those solutions might be, but the problem in Romania is the same as it is everywhere else in the world - a lack of money. Everyone in Romania is craving for money: the people who face record unemployment levels this year, businesses that are seeing a drop in orders and sales, and even the government, which has to keep the budget deficit in check. Such a need for money should, under normal circumstances, be a great opportunity for banks to lend. But for that to happen, commercial banks need to have enough trust in the country's economic prospects and the government's ability to continue attracting foreign investment so that they can be sure they'll get their money back. For now, banks are extremely reluctant to prolong the lending spree they started in 2007 when Romania joined the EU; where they are lending, they're doing it for much higher interest rates.

Such attitudes on the part of banks are in contrast with Romania's financial situation: the economy for now is bandaged up with a monster loan worth almost €20bn from the IMF and other multilateral lenders granted in April. Two-thirds of that money will go to the central bank to support the currency from swings at a time of crisis, while another third is expected to finance the budget as well as revive commercial lending and investments.

However, signs of commercial lending reviving are pretty thin on the ground, mainly as banks cannot rely on the economy being able to support jobs and wages and, thus, borrowers' capacity to pay back the loans. Money from the lenders' parent banks abroad are not coming in at previous levels, forcing their subsidiaries to ensure credit lines either from money coming from deposits at higher interest rates or other businesses. For example, Banca Comerciala Romana, the country's biggest lender that's majority owned by Austria's Erste Bank, said this month it has already restructured about 20,000 loans worth some €275m. As many as 5,000 of those loans were mortgages worth some €200m, while the remaining 15,000 were consumer loans. BCR has granted roughly 1m retail loans in Romania. Most of the 40 banks in Romania face similar issues.

The "provisions trick"

However, there are other explanations for the halt in lending by banks. Although the crisis had already hit Romania by December, banks operating in this country shifted the amounts they would normally have to commit to provisions, or money set aside to cover bad loans, to January and February of this year in order to post healthy profit figures for 2008. This has already resulted in a decrease in profit in the first quarter for most banks, or in the case of a few lenders even a loss. And that also explains why most banks were reluctant to lend at the start of this year.

Another explanation that the banks themselves give is that the central bank's key rate is still too high to allow for commercial lending at attractive interest rates. Patrick Gelin, president of Societe Generale's BRD, the second-biggest lender, said loans in local currency bear interest rates of as much as 20%, making them unattractive. The central bank on May 7 cut its benchmark rate from 10% to 9.5%. However, bankers moan that this level is still too high to revive lending at attractive interest rates.

Still, bankers such as the president of Raiffeisen Bank in Romania, Steven van Groningen, and general manager of Banca Transilvania, Robert Rekkers, insist that lending started to slightly improve in March after the sudden halt in January and February. Van Groningen said the only solution is to resume retail loans at lower interest rates, thus reducing the margins between interest rates on loans and those on deposits, which is probably what the central bank wants commercial lenders to do.

However, not all banks are willing to give up on the great profit margins they so far have made in Romania, and the process of lowering interest rates on loans may take a while yet. Still, Banca Transilvania's Rekkers told the business daily Ziarul Financiar that, "the lending situation will get much better in the third and fourth quarters."

The issue that large banks have to consider is whether they should keep their money in Romania, suffering lower profit margins as they wait for a quick recovery and a pick-up in business, or send it back home to headquarters to be used in financial operations elsewhere. The latter would force Romania's government and its population to face a bleak 2009 (and even 2010) by cutting financing in the new EU member state. It would also delay any recovery and the resumption of healthy lending in the country.

As many as nine large banks, accounting for 70% of total banking assets in the country, all of them units of large European banking groups, on March 26 signed a letter in Vienna pledging to back Romania's economy and, if need be, bring more money into the country. The banks - Erste Bank, Raiffeisen International, Eurobank EFG, National Bank of Greece, UniCredit Group, Societe Generale, Alpha Bank, Volksbank and Piraeus Bank, said in the letter they would support the agreement reached between the IMF and the Romanian central bank to run stress-tests based on established IMF methodology in order to estimate the potential losses that the Romanian banks might face under the diverse scenarios during the period of the IMF/EU lending programme.

A first test of the banks' willingness to lend will come after May 23 when the central bank removes the 40% minimum-required reserves for interest rates on foreign-currency deposits with maturities longer than two years. That should release about €800m into the market at once, according to central bank estimates. Whether banks will put that money to work in the form of new loans, as would be the desire of the central bank, or use it to repay their own debts to shareholders, thus taking them out of the country, is something that remains to be seen.

At the end of the day, everything depends on the government's ability to help Romania emerge as one of the best destinations for investments in Central and Eastern Europe once the world's bigger economies emerge from the financial crisis and start looking around again for opportunities.

The problem is that although the government itself predicts a deepening of the recession in the country, it seems too slow and inefficient in bringing about the much-needed policies that would speed up the absorption of the huge EU funding the country is entitled to, thus delaying the large infrastructure projects that would help Romania better cope with the crisis.

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