Romania’s government claims controversial mortgage bill risks raising borrowing costs, deficit

By bne IntelliNews March 17, 2016

Romania’s budget deficit could increase by €1bn, or 0.7% of GDP, and the sovereign borrowing cost could also increase if the parliament endorses a controversial bill on mortgage loans in its current form, finance ministry state secretary Enache Jiru warned on March 16.

The bill is based on the principle of giving in payment (datio in solutum). Under the bill, mortgage holders would be able to give collateralised property back to banks in exchange for final termination of their contracts with no further penalty. It has already drawn criticism from Romania’s central bank and commercial banks, and the International Monetary Fund.

The figures cited by Jiru might raise concerns, but they are estimated by the government official under an extremely pessimistic scenario.

The government advocates waiving the provisions of the bill for mortgage contracts signed under Prima Casa (first home) programme, which would no longer be feasible if the bill is endorsed in its current form, the official explained.

Banks would be entitled to recover the money from government, as the guarantor of borrowers, if recipients of Prima Casa contracts rely on the provisions of the datio-in solutum law, Jiru said. The impact on the budget is estimated at €1bn, he claimed. Jiru also explained that the government has received specific inquiries about the datio-in solutum bill from investors, on the occasion of the re-opening of a sovereign Eurobond earlier this year. He implied that investors had expressed concerns about the impact of the bill on macroeconomic stability.

However, the estimates mentioned by Jiru were calculated under an extremely pessimistic scenario that is unlikely to happen. The guarantees extended by the government under Prima Casa amount to €3.15bn for 170,000 contracts signed after 2009, according to data revealed by economica.net, which is consistent with Jiru's statements.

Jiru assumed under this hypothetical scenario that 50,000 recipients of the programme would default. However, according to the central bank, the NPL ratio for Prima Casa is extremely low, which might be explained by the favourable lending terms. Furthermore, the loans were extended at a time when property prices were rather low – as opposed to the loans extended in 2007-2008 when prices were at high levels.

The bill has already been approved by the senate, but still needs the approval of the lower house of parliament, the Chamber of Deputies, which is also able to amend the text. The bill has been criticized by bankers who say it will force them to demand higher deposits from borrowers.

Under the form approved by the senators, bill will apply to properties purchased under the Prima Casa programme, where the state guarantees mortgages for first time buyers.

Regarding the impact on the sovereign borrowing cost, Jiru noted that Romania’s borrowing costs on both domestic and international markets are currently minimal, but investors have started to show signs of concern due to the mortgage bill.

“Romania has great confidence from investors, and we shouldn’t ruin something we have already built and it’s well built, because everything will have repercussions on the state budget by increasing costs to finance public debt,” Jiru said, according to Agerpres news agency.

 

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