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Evaluating the impact on Romania of measures adopted by EU leaders on Wednesday night

de Cristian Pantazi, transl. C.I.
Vineri, 28 octombrie 2011, 14:04 English | Top News

Problemele Greciei si ale zonei euro, rezolvate pentru moment. Ce cistiga Romania?
Foto: Agerpres/Xinhua
A calmer period for financial markets and an assurance that foreign banks will not withdraw capital from subsidiaries on the outskirts of the euro empire are the two key advantages Romania has following the deal of EU leaders on the set of crisis measures. But major question marks persist among authorities and business people in Bucharest. What do the measures decided forcedly in Brussels on Wednesday mean in real terms and what are the key issues of uncertainty following the euphoria of the moment?

Effect no. 1: Help for Greece and an European Financial Stability Facility increase may lead to cooler financial markets. That is, a possible halt of interest rise for Romanian loans

  • Context: Foreign lenders have become extremely cautious when it comes to Romania, as Bucharest officials including President Basescu have been saying. The reason? Lucian Croitoru, aide to the Romanian central bank governor, said prior to the European Council on Wednesday that a fear of contagion in the area had scared lenders. The result was a constant rise of interests at which the Romanian state is borrowing from abroad to cover its functioning needs.

What is it that calmer financial markets bring? Romanian MEP Theodor Stolojan says "the set of measures agreed on on Wednesday means calmer financial markets and calmer interests. Implicitly, it may lead to a more relaxed approach by banks which provide credits to the business environment, as the uncertainty that was felt so far has affected lending".

Alexandra Gatej, president of the American Chamber of Commerce in Romania (AmCham), welcomes the deal in Brussels and says "the signal that a solution was reached is a good thing. Everybody in the private sector knows that decisions must be made in a crisis situation. We are now waiting for the technical details and I would like to see palpable measures resulting from this deal, as facts not words are the ones that matter".

Florin Citu, a banking analyst, is more sceptical when it comes tot he effect of the set of measures on financial markets. The EFSF capitalization by 1 trillion euro is very small; some 3-4 trillion were needed to cover the need to fund the euro zone for at least three years and help investors overcome their concern. The document provides very little detail, which means we'll go with the markets until the details come to light. The deal does not guarantee cheaper loans" (more on his blog).

Mihai Tanasescu, Romania's representative to the IMF, says the deal will bring more stability and predictability for the financial system. "I think the markets will react positively when it comes to ROmania. But Romania must continue its structural reforms in order to impede some speculations of the markets that might make lending harder". Tanasescu also says "it is a success even when considering that the implementation details are not yet established (...) A coherent implementation of this plan is now vital and technical aspects should be established by the G20 summit in Cannes in early November".

Effect no.2: Removing the risk that European banks withdraw their capital from Romania

An increased capitalization of European banks has been discussed at EU level since the appearance of stress test results in July 2011. That means investors started to lose trust in banks which have undertaken too much risk by crediting Greece and other struggling countries. In order to re-establish investor trust in exposed banks, EU leaders decided to demand banking shareholders to increase capital from 4% to 9%. A total of 106 billion euro must be raised by banks until June 2012.

But non-euro countries, especially Romania and Poland, have been insisting that this move should not be done by allowing banking groups to take capital away from their subsidies in these countries. The danger was obvious: should a foreign bank withdraw its capital from its subsidiary in Romania, than lending in Romania would suffer.

The position supported by Romania seems to have been eventually accepted in Brussels. At least that is what President Traian Basescu said at the end of the summit.The deal signed by EU leaders shows national and European banking authorities will overview the capitalization of European banks so as not to allow capital be removed from subsidiaries.

Lucian Croitoru strengthened Basescu's statements by saying after the summit that the banking system in Romania would not be affected by the request of capitalization of banks in the euro zone. "The way the banking systems looks now, we will not see negative effects on it, on the contrary we will see that fears are exaggerated in Romania," Croitoru said as quoted by news agency Agerpres.

Theodor Stolojan says we now deal with " a certain relaxation of our worries related to the mother-bank - daughter-bank relationship. The wording in the official announcement does not cover all these worries (...) If mother-banks need capital, they will try to take it out of Romania, but it's not that easy to take out money because it's immobilized".

Alexandra Gatej is cautious about this announcement of EU leaders which lacks the technical details of how the capitalization will be done: "The care that banks in non-euro countries should not be affected seems to have been solved but investors are scared and will check whether EU leaders' promises are applied. Companies investing or willing to invest in Romania are linked to European banks and need guarantees that the deal in Brussels is applied so as not to see banking capital leaving Romania. If mother-banks withdraw their capital, the credit for the real economy and for the private sector will be more expensive".

Florin Citu says that "the deal in Brussels leaves the door for banking capital withdrawal a little open. On the other hand, should this capital be forced to remain here, it will not credit the real economy in countries where it's needed".

Speaking of the impact of these measures on Romania, Sibex head Cristian Sima said in an online talk with readers that "the Romanian banking system was last night saved from panic. Romanian citizens are far from leaving the Greek nightmare".

  • Background note: Romania went through a similar moment in 2009 when it contracted a loan from the IMF, the World Bank and the European Commission. IMF then obtained a deal with the nine most important foreign banks with exposure in Romania that they not withdraw their capital. Banks complied with the deal.

What the package of measures doesn't solve: the deep euro zone crisis and lack of structural reforms in Romania

People consulted by say unanimously that this set of measures voted on Wednesday night only solves a short-term problem. They say that EU leaders gave an important last minute signal that they want to solve the deep sovereign debt crisis but that it remains to be seen how other affected countries such as Italy or Spain will comply.

Besides the euro zone difficulties, Romania has its own set of problems that must be solved to return to growth.

"The convened package solves a momentary problem, the urgent problem in Greece and the euro zone", says Theodor Stolojan. "It was a very strong political decision. Beyond the three adopted measures, you'll see that the package convened by EU leaders also includes other important matters. One of them is strengthening the fiscal discipline of member states".

Florin Citu supports the idea that austerity measures in Italy and Spain which will accompany the package will have a major effect on Romania: "This austerity may lead - as in the case of Greece - to a decline of economic growth and will have an impact both on Romanian exports to these markets and on foreign investments in Romania. This means the burden of growth falls on the Romanian consumer". Citu says that Romania must solve domestic issues such as those related to the justice sector in order to lure foreign capital: "Potential investors looking of an investment target will not look only to Romania's official figures: the difficult and unpredictable access to justice, the way law is applied in commercial disputes, difficulties in recovering arrears from state companies in court also matter for them".

Cristian Sima warns of a difficult period to come: "2012 and the next ten years will be very difficult as long as political leaders worldwide fail to understand the dramatic situation we're in".

Alexandra Gatej says that the economic situation of Germany - Romania's main trade partner - matters more for Romania. "The situation is still fragile both at EU level and in Romania and the predictability so much needed by the business environment is missing. I will further bet on production and exports as engines of economic growth".

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