Graham Stack in Bucharest -
With the third tranche of a loan from the International Monetary Fund (IMF) on hold until a new government is in place and willing to meet the fund's lending criteria, the Romanian government will have to turn to the domestic credit markets to fund outstanding expenditure in 2009. Analysts anticipate a resulting liquidity drain that will stall any economic recovery.
As anticipated, the collapse of Romania's grand coalition government on October 13 in the run-up to tightly contested presidential elections on November 22 has made it impossible for the IMF to disburse a €1.5bn tranche of a €20bn stand-by loan agreed in April. An additional €1bn tranche of support from the EU was also tied to IMF approval.
With the budget deficit likely to hit over 8% of GDP by year-end, adviser to the central bank governor, Adrian Vasilescu, was quoted by media as saying that the government needs €5bn. And the only alternative to IMF money is expensive government borrowing on the domestic market, which will drain liquidity that should be helping to restart the economy, thus prolonging the recession.
"Printing money is out of the question without foreign exchange cover, therefore the only financing resource remains for the moment the domestic market," says Melania Hancila, chief economist at Volksbank Romania. "However the cost of borrowing will be significantly higher, probably double, inducing an extra burden on Romania's debt servicing. 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."
As Nicolaie Alexandru, chief economist at ING Romania, points out, "Even if we got the money from IMF/EU, it would have been still difficult to finance the budget deficit, as those amounts were unlikely to cover liquidity needs during these two months."
Alexandru agrees that a figure of €5bn will be needed for November and December. "It might be that the Ministry of Finance pays more than a maximum of 10% for lei 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 lei to weaken, the [central bank] will be active in the foreign exchange market, market rates will go up and the easing cycle will stall indefinitely."
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