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Analysis: Romania could reach financing crisis in November
Romania may be faced by a financing crisis in November because of the government decision to refuse selling state binds at profits higher than 7% and the state could pay significantly more. The government meets difficulties in implementing austerity measures needed to carry out the accord with IMF, thus pushing interest rates requested by investors higher and higher, Reuters reports.
The Finance Ministry refused the verdict given by investors, explaining that austerity measures will eventually determine reduced profits while additional funds may be attracted from foreign markets.
The appointment of a less known finance minister, Gheorghe Ialomiteanu, did not change this strategy. The minister’[s hand could be twisted if IMF decides next week that the government should stop accumulating arrears, Reuters notes.
Solving these debts would leave the government without funds which will not allow it to ignore local financial markets.“Until then, the financing necessary will be very high and arrears may grow if it does not give up the present strategy about loans. They cannot get out of this situation,” said the senior economist of IMG Bank, Nicolaie Alexandru Chidesciuc.Once the government gives up the 7% level, profits may grow to 8% or even higher, he added.
In the secondary market, which the government says it has a low liquidity which cannot indicate a real cost of loans, most bonds have a profit of 7.25% or even more, less than 6% in April.However, the interest for financial instruments issued by Romania is still high and the cat and mouse game is meant to force the government to assume higher risks, before the investors could take advantage of a drop of loan costs, which should be done gradually in case the government maintains austerity.
The executive has to pass a series of difficult votes in Parliament, concerning austerity measures and a possible no confidence motion which may intensify fears concerning the country’s finances.
IMF showed in August that they would not allow Romania not to fulfill quarterly targets about arrears by conditioning the next payment installment by the government until the end of September.
The government will take into consideration this request but analysts estimate additional arrears of 2 billion lei, plus the accumulation of another 1-2 billion lei because it could not attract sufficient funds from bond sales. These debts will be probably paid shortly after the IMF mission of October-November.
Romania must roll debts of 7 billion lei in November and will have to cover a monthly budget deficit of three billion lei in November.The total of 13-14 billion lei is close to the value of loans made by bonds in 2008 and by the funds attracted by the government in the four months since the stabilization of profits.The Executive is trying to compensate with bond issues in euro, where profits are 2% lower, without taking into account the exchange rate risk. The state can get money by emergency financing in monetary markets and from bilateral understandings with banks, but cannot se these procedures every month.
Issuing bonds in another currency or in foreign markets has a limit. If they want to sell too much they can meet difficulties in launching bonds in these markets and costs can be higher, said an analyst at Barclays Capital London.Profits grew from less than 6% in April because of the growing inflation and the unstable political situation but they are less than 14% reached last year in the period in which PSD left the government.
However, Romania, appreciated for its austerity efforts with one of the lowest loan levels in Europe, will not have problems in finding the necessary money this year as long as it remains in good relations with IMF, Reuters notes.Local banks are willing to finance the government, after covering the largest part of losses caused last year by outperforming loans through profits generated by state crediting.
Foreign investors expect the state to give in and will be very interested in buying government bonds when profits grow, Hewitt said.If the Finance Ministry continues to concentrate on issues with maturity up to 6 months it could reach a more difficult situation, the funds needed monthly reaching 8 billion leimonth at the beginning of 2011, from 4-5 billion lei at present, said Lars Christensen, Danske Bank analyst.