234095 11/10/2009 14:01 09BUCHAREST756 Embassy Bucharest CONFIDENTIAL 09BUCHAREST723 VZCZCXRO4588 PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR DE RUEHBM #0756/01 3141401 ZNY CCCCC ZZH P 101401Z NOV 09 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 0063 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY C O N F I D E N T I A L SECTION 01 OF 02 BUCHAREST 000756
STATE FOR EUR/CE ASCHEIBE AND EEB/IFD/OMA TREASURY FOR JBAKER/LKOHLER
E.O. 12958: DECL: 11/10/2019 TAGS: ECON, EFIN, PGOV, IMF, EUN, RO SUBJECT: ROMANIA: IMF TEAM DEPARTS AND TAKES ITS CHECKBOOK WITH IT
REF: BUCHAREST 723 AND PREVIOUS
Classified By: DCM Jeri Guthrie-Corn for reasons 1.4 (B) and (D).
1. (SBU) The IMF assessment team charged with determining whether Romania has met its obligations for the next funding tranche packed its bags and went home on November 6, declaring in a closing news conference that it cannot complete its assessment until Romania resolves the current political impasse and has a functioning government in place. The decision to suspend the visit means that chances are very slim Romania will receive any more IMF money this year, and accompanying representatives from the European Commission (EC) and World Bank (WB) stated flatly that their own disbursements to Romania cannot come before early 2010. The team had planned to postpone its visit after the government of Prime Minister Emil Boc fell in a no-confidence motion on October 13. However, they stuck to the original schedule in response to an appeal from President Traian Basescu and other political leaders (reftel) who were scrambling to preserve the chance that Romania could qualify to receive the money this year. That gamble failed, and the Government of Romania (GOR) now must borrow in the commercial market to replace the more than two billion euro -- one billion from the EC, 360 million from the WB, and half of the 1.5 billion due from the IMF -- it had been counting on for deficit support.
2. (SBU) In a November 9 briefing to the diplomatic corps after the team's departure, local IMF Resident Representative Tonny Lybek sought to put the best possible face on the situation, noting the team's conclusion that Romania had generally met the technical targets through September 30 required to qualify for the next funding tranche. (Comment: Lybek said the one exception was GOR payments on arrears, which of course comes as no surprise to U.S. companies like Cargill and Bechtel which for many months have been owed VAT refunds or late payments for work performed. End comment.) Lybek said domestic demand continued to be very weak but that external demand for Romania's exports was improving, leading the IMF to revise their 2009 GDP projection upward from minus 8.5 percent growth to between minus 7.0 and 7.5 percent. Reflecting weak internal demand, the current account deficit will fall to around 4.5 percent of GDP this year, a huge adjustment from the greater than 12 percent deficit Romania was running in 2008.
3. (SBU) Still, the fact remains that the current political impasse is preventing Romania from making any progress on the structural reforms required under the IMF agreement. Despite maneuvering in Parliament to authorize the interim Boc Government to submit a proposed 2010 budget, the IMF believes Boc's cabinet is constitutionally barred from doing so, and an approved budget which clearly establishes a deficit target of 5.9 percent of GDP and outlines the measures the GOR will take to reach this target is an essential precondition for the next disbursements from IMF, EC, and WB. With the next IMF Board meeting tentatively set for December 14, and internal IMF procedures requiring that targets be met a full week in advance of the meeting in order for the Board to approve release of the money, a satisfactory 2010 budget must pass Parliament by December 7 -- the day after the presidential election runoff. While technically not impossible, Lybek acknowledged that the chances of having a new prime minister and cabinet approved and in place to meet this deadline are very slim, and receding with each passing day.
4. (SBU) In terms of required legislation, Lybek isn't expecting any more progress on pension or fiscal reform bills this year. He welcomed last week's decision by Romania's Constitutional Court to uphold the unitary wage and government restructuring laws passed by Parliament in September, but noted that the resulting delay in implementing these laws means they will not help Romania meet its deficit targets this year. The wage law, for instance, includes provision for a 10-day mandatory furlough for all central government employees. The GOR will likely not be able to implement this provision until mid-December at the earliest, meaning that wage savings won't show up in the budget until January. As a consequence, the GOR will almost certainly overshoot its IMF-agreed 2009 deficit target of 7.3 percent of GDP by at least half a percentage point (i.e. to 7.8 percent), Lybek admitted. He also expressed concern that while the central government is working hard to keep spending under control, local governments and state-owned enterprises continue to exceed their targets.
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5. (SBU) Lybek stressed that 2010, especially the first half of the year, will be a critical time for the IMF program and that Romania must take "very strong measures" to pass the needed legislation and make the tough political choices to keep the deficit at 5.9 percent of GDP. While careful to say that deciding where to cut is Romania's job, not the IMF's, Lybek believes that significant public sector layoffs, elimination of subsidies to money-losing state-owned companies, and tax increases are inevitable. If such measures are not taken, the IMF predicts the 2010 deficit could exceed nine percent of GDP, a crushing level likely beyond the GOR's capacity to finance, Lybek concluded.
6. (C) Comment: In response to the IMF/EC/WB mission's decision to cut short its visit and head home, Romanian officials from Basescu on down have rushed to reassure public sector workers, pensioners, and others that the GOR can continue to finance the deficit and meet its payment obligations through the end of 2009. They are probably right, but the cost will be very steep. National Bank of Romania (BNR) senior adviser Adrian Vasilescu told the media November 6 that the GOR's financing needs for the rest of the year are on the order of five billion euro, and all of that must now be raised through debt auctions in the domestic market. Even BNR Governor Mugur Isarescu, normally circumspect in his public comments, described the financing dilemma absent IMF/EC money as an "acute problem." Contacts in the banking sector tell post that local banks are coming under very direct, if quiet, pressure from both BNR and the Ministry of Finance to keep buying GOR debt. With little prospect that a functional government will be installed until after the presidential elections, the financial vise in which the GOR finds itself can only get tighter. End comment. GITENSTEIN