197727 3/19/2009 11:49 09BUCHAREST180 Embassy Bucharest CONFIDENTIAL 09STATE23758 VZCZCXRO3750 PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR DE RUEHBM #0180/01 0781149 ZNY CCCCC ZZH P 191149Z MAR 09 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 9328 RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RHEHNSC/NSC WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY C O N F I D E N T I A L SECTION 01 OF 03 BUCHAREST 000180
STATE FOR EUR/FO DAS GARBER, EUR/CE ASCHIEBE, EUR/ERA, AND EEB TREASURY FOR JBAKER AND LKOHLER
E.O. 12958: DECL: 03/18/2019 TAGS: EFIN, ECON, PREL, IMF, EUN, RO SUBJECT: ROMANIA: INCREASINGLY GLOOMY 2009 OUTLOOK SETS STAGE FOR IMF STANDBY AGREEMENT
REF: STATE 23758
Classified By: Charge d'Affaires Jeri Guthrie-Corn for reasons 1.4 (b) and (d).
1. (C) Romania needs the stability of an IMF agreement to finance the private external debt gap, protect foreign exchange reserves, and advance structural reforms in a difficult political environment, officials told DAS Judy Garber and U.S. Treasury visitors in meetings March 10-11. Still, Romanian officials insisted that the domestic banking sector remains relatively sound and played down fears that potential troubles at parent banks in Western Europe would force these banks to pull capital from local subsidiaries. The Government of Romania (GOR) now expects 2009 economic growth to range from minus 0.5 to plus 0.5 percent, and acknowledges that the budget just passed by Parliament will require major revisions as growth and revenues slow. Even so, officials do not favor a "regional approach" which treats Eastern Europe as a bloc, and said that international financial institutions (IFIs), the EU, and investors should judge each country on the basis of its own fundamentals. End summary.
"WE DON'T NEED A REGIONAL APPROACH TO THE CRISIS"
2. (C) The Charge d'Affaires and visiting DAS Judy Garber, along with Jeffrey Baker and Lukas Kohler of U.S. Treasury's Office of Europe and Eurasia, met with National Bank of Romania (BNR) Governor Mugur Isarescu and Minister of Finance Gheorghe Pogea on March 10-11 to discuss the macroeconomic situation in Romania and to convey some of the USG's concerns expressed in reftel. Baker and Kohler also met separately with other officials from BNR, MOF, private banks, and resident representatives of the IMF, World Bank, and EBRD. Governor Isarescu explained that the financial crisis, beginning last fall, did not have a direct impact on Romania's financial sector, but that the real economy has been hit by an escalating series of secondary effects since then: exchange rate depreciation; drying up of credit (with Western banks shifting quickly from a posture of "aggressive generosity" to "aggressive pessimism"); a drop in production, especially in industries closely integrated with the rest of Europe; and a sharp decline in real estate prices. These economic shocks are increasingly being felt through rising unemployment, lower personal and corporate incomes, and declining revenue flows into GOR coffers.
3. (C) Isarescu noted that Romania's external public debt as a percentage of GDP is low, but private external debt (at more than 24 billion euros) is substantial. Of this, credit lines from mother banks to subsidiaries represents 40 percent -- and Isarescu went to pains to emphasize that parent banks have made "firm guarantees" to BNR to renew the large majority of this credit -- but covering the other 60 percent of non-bank sector debts is BNR's biggest concern and would be the focus of an IMF program. Isarescu personally believes Romania will still eke out slightly positive growth in 2009, though this will depend heavily on government revenues and spending; the "best case" scenario is to "hold the line" this year without a visible decrease in living standards. When asked about calls for a "regional approach" by the EU and IFIs to Eastern Europe, particularly given the risk of regional contagion, Isarescu was skeptical. Romania doesn't need to be "rescued" with the whole region but rather to be judged fairly on the basis of its own fundamentals, Isarescu replied.
4. (C) Finance Minister Pogea echoed Isarescu's theme, saying that while coordination with other EU member states to confront the crisis is a top priority, Romania does not need a "one size fits all" regional approach; the GOR simply asks that other governments avoid protectionism and take measures to ensure the stability of their banks with operations in Romania. "Beyond that, we will take our own measures," he insisted, pointing out that the impending arrival of an IMF negotiating team was at Romania's behest. Pogea described his frustration, just two months into office, of grappling with the runaway spending and substantial arrears left by the previous government; paying off those arrears and then bringing spending under control is the new GOR's biggest fiscal challenge.
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5. (C) After describing interim measures the GOR is taking to shore up social safety nets, Pogea acknowledged that the recently-passed budget will have to be revised downward very soon, and that public sector wages and benefits will be a major target. (Pogea noted that public sector personnel costs have risen by three percent of GDP in four years, while government productivity hasn't risen at all.) Under the auspices of an IMF program, the GOR will undertake structural reforms to streamline its budget and spending processes and simplify the tax code, changes which would be needed even if there were no crisis, he said. Pogea believes 2009 growth will hover near zero but will be "nothing even close" to the negative three or four percent the IMF and some others are forecasting, he concluded.
BANKING SYSTEM RESILIENT, BUT DEBT FINANCING A CHALLENGE
6. (C) BNR recognizes that problems with mother banks in Austria, Greece, and elsewhere could pose trouble for Romania, but the Central Bank's tough supervision and monitoring regime provides the necessary oversight to ensure the overall health of the domestic system, BNR Director of Supervision Nicolae Cinteza told the U.S. Treasury visitors on March 9. Cinteza pointed out that he has existing statutory authority to compel any local bank to increase its share capital, and has the power to suspend the voting rights of the majority shareholders if they fail to comply. The BNR believes that this measure, as well as the high foreign currency reserve requirements, makes it unlikely that a foreign shareholder will ever find it in their best interest to withdraw entirely from the market. Commercial bankers reaffirmed this message in separate meetings, saying that their banks were sufficiently capitalized and that they did not expect parent bank turmoil to cause them to stop operating locally.
7. (C) Overall GOR and commercial bank forecasts are neutral or borderline negative. MOF Director of Macro-Economic Analysis and Policy Dorin Mantescu provided growth forecasts for next year closer to the consensus forecast (negative 0.5 percent to zero growth in 2009) than the MOF had provided previously. Pressures on the debt market are also expected to continue according to the Director of Treasury and Public Debt, Stefan Nanu, despite efforts to front-load government borrowing in the first half of the year. Expecting a government deficit of 5 billion RON (1.5 billion USD), Nanu believes the GOR will be able to borrow this amount on the local market, but acknowledges the increasing interest burden caused by banks' preference for shorter-term debt at relatively high interest rates. (Note: The MOF auctioned 2 billion RON in six month treasury bills on March 16th with an average yield of 11.49 percent. End Note.)
8. (C) Of the major banks, Chief Economist Lucian Anghel of BCR-Erste was closest to the Ministry of Finance's estimates, predicting growth of 2-3 percent above the euro-zone, but acknowledging that this might very well mean that Romania's growth is mildly negative for the year. BRD-Societe General, another major bank on the local market, however, believes that growth will be positive for the year at 1-2 percent. The BRD Chief Economist, Florian Libocor, is strongly of the opinion that Romania is being unfairly lumped together with other countries, and expects macroeconomic performance for Romania in 2009 to be substantially better than others in the EU.
IMF, BANKS AGREE AN ASSISTANCE PROGRAM NEEDED
9. (C) The local IMF representative, Juan Fernandez-Ansola, told the Treasury visitors that he fully expects an agreement to be reached before the IMF team currently in country departs. Preparatory discussions involving the BNR and the MOF were recently held in Washington. An agreement will ultimately depend on Romania's adopting what the IMF considers a "realistic" macroeconomic outlook for 2009 and the budget and revenue projections to match. This will likely result in a larger fiscal deficit than the GOR would like, but Fernandez-Ansola noted that the GOR must end the current practice of multiple budget rectifications (to adjust for revenue changes) throughout the year if they hope to benefit from an IMF program. BRD and BCR were both in agreement that an IMF program was probably advisable at this point, although they did evince some frustration that Romania has been driven to it by the court of market opinion, rather than a hard-headed look at economic fundamentals. The
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difficulty is going to be selling a package politically, after so many political leaders (including President Basescu) staked out a strong position opposing recourse to the IMF, contacts said. According to Fernandez-Ansola, BNR Governor Isarescu has convincingly made the case for an IMF program directly to Basescu and Prime Minister Boc, both of whom have become much more open toward an IMF program in their public statements in recent weeks.
10. (C) While internal GOR consensus has converged toward the need for an IMF program -- a major shift in position in just the last two months -- there are still potential roadblocks ahead. The Government could yet face significant opposition from public sector unions, which have vowed protests and work stoppages beginning next week if officials attempt major cuts in wages, benefits, or positions, even if "mandated" under an IMF rubric. This is a problem largely of the politicians' own making, since officials from PM Boc and PSD leader Mircea Geoana on down all fell over themselves to make sweetheart promises to core constituencies in the late 2008 parliamentary election campaign; they now find they must not only renege on most of those promises of big increases, but may have to impose further cuts. Public sector employees have been left with a substantial perception gap between what they believe they deserve and what the GOR can actually afford. Geoana's and the PSD's roles as potential spoilers are another factor; statements by Geoana suggest he is already positioning himself as champion of the downtrodden against Basescu and the PD-L if IMF-mandated austerity measures spark popular resentment. This could well become one of the defining themes of the fall presidential election campaign.
11. (C) Comment continued: In the meetings with Isarescu and Pogea, as well as other recent conversations with interlocutors, post detects little sense that Romania believes big EU members should be doing more in terms of stimulus measures or that a regional rescue package for Eastern Europe is warranted. Indeed, in the wake of calls over the last couple of months for such an approach from Hungarian and Austrian leaders, Romania has been conspicuously silent. Romanian officials fear that a regional approach will not take proper account of their particular situation, just as they believe that talk of a regional contagion unfairly lumps Romania with other countries (Hungary, Baltics, Ukraine) where the situation appears worse. There may still be an element of denial at work here, but Romanian sentiment seems to be that persistent talk of the need to address a "regional" problem may contribute to spreading the very illness that such medicine is ostensibly intended to prevent. End Comment. GUTHRIE-CORN