Analysts: In 2011, the management of the public debt was faulty

• Daniel Ionescu: "The Romanian banking system has reached the limit of its exposure to domestic sovereign debt"

• Lucian Isar: "The interest rates exceeded the sustainability threshold"

• Ionel Blănculescu: "Demand from banks will no longer be as high as it was in 2011"

Analysts claim that the government managed the public debt in a faulty manner, and the interest rates at which it borrowed were very high.

Last year, Economics Ph D Daniel Ionescu said that the "precarious" quality of the public policies was demonstrated by the high average borrowing cost that the government had to pay. He said: "The average cost paid by the government to attract the missing budget funds from the domestic market, whether in lei or in Euros, faithfully reflected the precarious quality of its public policies, first of all the errors it made in managing the crisis which hit Romania after 2008.

In my opinion, the danger and the gravity of the public borrowing policy of the current government do not come from the interest rate paid for those loans, but rather from the fact that the government bonds used for financing - < benchmark > bonds (denominated in lei) and government bonds (denominated in Euros) - are coming to maturity after the budget execution of the two years that the current government still has left (2011 and 2012) and the fact that these resources, which the taxpayer will be saddled with, are allocated in a manner which goes completely against the rational goal (economic and social efficiency)".

Daniel Ionescu added that, because of the "inefficiency" in the absorption of European grants, the deficit of the state budget is almost exclusively financed by borrowing from the domestic market.

Economic analyst Lucian Isar says that the management of the government's debt was flawed, even though the Ministry of Finance had a good team. He said that the main reason for that was that the important decisions are not made in the Ministry.

Lucian Isar said that another reason why the public debt was managed badly because of the "chicanery" of the monetary policy, which only maintained liquidity on the short term part of the interest curve and kept them on an upward slope.

"The interest rate which the government borrowed at were higher than sustainable, with the difference coming from the quality of the debt's management", he went on to say.

Economic analyst Ionel Blănculescu shares the same opinion. He said: "The interest rates were unfair, far higher than those which the NBR paid to commercial banks for the minimum mandatory reserves denominated in foreign currencies, which have represented the main source of the loans granted to the Romanian government, immediately after they were released following the entry of the amounts borrowed from the IMF, of over 16 billion Euros, which was the untold requirement to lower the RMO (ed. note: the minimum required reserves) from 40 to 25%, on the first agreement, and from 25% to 20% on the second agreement, in proportion with the value of each agreement".

• Lucian Isar: This year, the government will borrow at a lower interest rate

Lucian Isar considers that this year the government will be able to borrow from the domestic market at lower interest rates, since this year the weight of "shuttle" financing will increase".

He said: "< < Shuttle financing > > is having the government borrow from certain preferred banks, which in turn receive financing from the NBR. This way, everyone is happy. The banks in question earn about 80 basis points without any liquidity risk, and the Ministry of Finance is able to borrow for what it needs. The drawbacks of this strategy are the fact that exposure concentrates and value is transferred to a small number of players".

Ionel Blănculescu considers that banks will be less willing to lend to the government than they were last year: "Faced with the sovereign debt crisis, banks will not be as willing to lend as they were in 2011. It may be that more than 10 billion Euros out of the 16 billion Euros needed to refinance the budget deficit and roll over the debt, may not be raised, except at a high cost. And most likely, for those with high interest, the level will increase to more than 10 billion Euros".

Daniel Ionescu said that the accrued public debt is a burden for any budget execution, regardless of whether it is adequately structured in terms of maturity or not. He added that regardless of the evolution of the financial market - the interest rate and the level of the CDS (ed. note: credit default swap) - the government will be forced to resort to new loans (domestic and foreign).

• Blănculescu: The appetite of banks for government bonds will be completely different this year

Ionel Blănculescu said that last year, banks had a rather significant willingness to buy government bonds.

He went on to say: "Most likely, this year will be completely different than it was in 2011, because the sovereign debt crisis has spread the infection, through contagion, to the subsidiaries of major banks, which are now forced to ration their spending on emerging markets, others are forced to return home, others need to help their parent banks with money from their home markets, and in the worst cases, to sacrifice themselves, that is, to sell themselves to save their parent banks from bankruptcy".

Lucian Isar said that certain banks have already requested restrictions to be lifted and reallocations for the exposure to government bonds.

He went on to say: "Not all exposures are the same. Exposure in lei is not similar to exposure to government bonds denominated in foreign currency, and is different from a club loan according to the British law denominated in foreign currencies, and is also different from the amounts which are part of the minimum required reserve. The recent tricks, by which club loans were used, not only kept the government away from adequate diversification and maturities for its borrowing, but also reduced the exposure limits of the domestic banking entities".

Daniel Ionescu said that the appetite of commercial banks for government bonds needs to be viewed from two angles: "When considering the banks' own capital resources and the deposits raised from the population (individuals and companies), the appetite is controlled by the obligations it has taken on, as a financial institution to provide a return to shareholders and to pay interest to depositors. In terms of the quality of the invested resources, the appetite is controlled by risk.

Since the aggregated risk of government bonds (sovereign debt) is usually close to zero, the appetite of the domestic banking system to buy public debt is only limited by the interest rate offered and by the capital it has available. The Romanian banking system has reached the limit of its exposure to the domestic sovereign debt. The balance needed to absorb the issues of government bonds was solved, including with the help of the NBR (monetizing the sovereign debt crisis acquired by the banks)".

• Daniel Ionescu: This year is extremely thorny

Daniel Ionescu claims that the advicee to borrow in lei is commendable, but it is impossible to do so. For payments denominated in foreign currencies, there will be a need to resort to foreign loans, but for now, there is an agreement with IMF underway of approximately 5 billion Euros.

He went on to say that if the amounts made available through the agreements with the international organisms will not be enough, the government will turn to the foreign markets: "If the money made available by the major financial institutions (the IMF, the World Bank, and the ECB) will not be enough to cover the borrowing needs - and it won't! - the government will need to resort to the private credit market, where the cost of loans and the interest rates are governed by the CDSs.

In my opinion, regardless of the evolution of the foreign financial crisis, 2012 is a year which will be extremely difficult - that is not to outright say it could be extremely dangerous - for Romania. Successfully avoiding default will require a good management of the short term foreign debt (with policies dedicated to eliminating this deficit) and professional measures of foreign borrowing to be able to service the medium and long term debt".

I am worried that, given the "unfriendly" nature of 2012 - a particularly difficult electoral year, if we are to judge by the way it began - and the government's lack of willingness to act pro-actively in order to help the country escape economic depression, we will get in trouble!"

Lucian Isar said that, last year, the government had plenty of moments when it could have borrowed at reasonable costs, the latest being in the summer of 2011.

He said: "In 2012 the government will be able to borrow from the foreign markets if it can prove that the money will go towards investments. The latest fiasco on the American market is also owed to the fact that the current approach of Romania basically amounts to a consumer loan".

Ionel Blănculescu said that the government will be able to borrow from the foreign markets, even though it is unknown at what costs.

He said: "If we will have an intelligent government, which will use Arab and Chinese money, then everything will be alright! If not, we will use European money, at an outrageous cost, because after all, it's not the people in the government who have to bear the cost of those loans from the EU, but the silent majority".

For the first quarter of 2012, the Ministry of Public Finance has announced an estimative volume of 14 to 16 billion lei of government bonds issued for the domestic market.