How long will we keep seeking debt-based prosperity?

In his new year message, designated prime-minister Sorin Grindeanu promised urgent measures would be taken to increase the quality of Romanians' life. Isn't the irony of recent history cruel, when similar promises have been made in 2008, without taking into account the evolution of the global economy?

The fiscal relaxation measures should keep the preservation of the economic growth trend that has been around for the last two years, but the gradual accumulation of domestic and foreign imbalances show that the "engine" of consumption cannot function much longer.

Beyond the major question sign concerning the realism of the economic program of the new government, which includes far too few measures to cut spending, the actions of the National Bank of Romania will be crucial in the honoring of the government's promises.

The inflation forecasts for the end of 2017 show an increase in prices of about 2%, a level which is far still below the 2.5% target. Under these circumstances it is likely the policy rate will not be raised, but unfortunately, the hike in interest rates may not depend on the action of the central bank, just as it seems to be the case on the foreign markets. What is happening on the international markets shows that the interest rates can get "decoupled" from the "will" of the central banks.

The primary market for government securities has already seen this phenomenon. NBR data concerning the government bonds issues in lei on the primary market show that in Q4 2016 there have been four failed auctions (ed. note: the amount borrowed was zero), and in ten of those auctions the amount drawn was smaller than the one announced in the prospectus.

The average yield increased 87.7% for securities with a 6-month maturity during that period, to 0.76%, 68.9% for the 12-month maturity, to 0.87% and 22.9% for the 10-year maturity, to 3.49%.

Also in Q4 2016, the 3-month, 6-month and 12 month-ROBOR interest rates rose 30.4%, to 0.9%, 20.7%, to 1.11%, and 14.7%, to 1.25%, respectively.

Under these circumstances, the refinancing risk has significantly increased, especially amid a high need for refinancing of government bonds in lei in the medium term.

Despite historic lows of the interest rates over the last few years, both on the foreign markets and the domestic market, the governments that have been in place over these last few years have not been successful in changing the structure of the maturity of government bonds by increasing the weight of long term loans, which reflects the lack of confidence from creditors. Furthermore, the low interest rates have not prevented the increase in the interest rates expenses segment of the national budget.

They have increased by 682 million in the first 11 months of 2016, compared to last year's similar period, to 9.69 billion, according to data published by the Ministry of Public Finance.

The authorities are now awaiting for the same creditors to believe that the deficit target, of almost 3% of the GDP, will be honored in 2017 and to go back to lending at lower interest rates.

But are these expectations realistic, when there are significant uncertainties concerning the dynamic of capital flows in emerging economies and the pressures leading to the depreciation of the currencies in the region have intensified?

What will the NBR do, under these circumstances? Will it get involved even more in the "management" of the exchange rate, in order to offset the depreciation of the leu, given its inaction when it comes to the policy rate?

It is possible, but the far more important decisions of the central bank could happen on the macroprudential policy level, with direct effects on the increase in the financing costs.

The ultra-lax monetary policy of the last few years, combined with the extension of the "First Home" program, has led to an accelerated increase in the lending granted to households.

After reaching 122 billion lei in September 2012, the volume of corporate loans has entered a downward trend and had dropped by 16% in November 2016, a level similar to that of September 2010.

During that same time, the volume of household loans has increased 6.2%, amid a growth of 89.7% of the volume of loans denominated in lei and a 27.9% drop in loans denominated in Euros. It bears noting the significant increase in mortgages, of 57.1%, as mortgages in lei have increased 1528% in November 2016 compared to September 2012, amid a 56.7% percent increase over November 2015.

This explosive dynamic of loans to households denominated in lei will soon cause the NBR to move to the application of macroprudential measures specified in the CRDIV/CRR European legislative package and recommended by the European Systemic Risk Board (ESRB).

Based on the European Systemic Risk Board methodology present on its website (ESRB) and on the data concerning the corporate and household degree of indebtedness, we have estimated the deviation from the long term trend of the ratio between the components of non-governmental lending and the GDP.

This ratio is used in determining the CCB, Countercyclical Capital Buffer for commercial banks.

As shown in the section dedicated to macroprudential policy on the website of the National Bank, the CCB is "one of the macroprudential instruments introduced by the CRDIV/CRR legislative package and recommended by the European Systemic Risk Board for reducing and preventing the excessive growth in lending and indebtedness".

The Countercyclical Capital Buffer is being kept at 0% starting with January 1st, 2016, as shown on the website of the institution, which has recently updated its estimates used to set the amount of the CCB.

These estimates have only been published for the total degree of indebtedness, expressed as a ratio between the non-governmental borrowing (author's note: companies plus households) and the GFP. The deviation of that ratio when it comes to the long term trend still remains negative, amid the downward trend in corporate lending.

As for the ratio between loans to the population and the GDP, its deviation from the long term trend has entered positive territory since back in Q4 2015 and has risen 0.53 percentage points in Q2 2016, warning that we are witnessing an excessive increase in borrowing and indebtedness among households. According to European regulations, the NBR must impose additional capital requirements to commercial banks when the ratio of non-governmental credit deviation exceeds 2%.

It is also stated on the NBR website that "in the event of a disproportionate accumulation of risks on certain segments of lending, the CCB instrument must be complemented by other macroprudential instruments, such as changing the amount of the downpayment or the individual degree of indebtedness".

There have been indeed recent warnings from the NBR officials concerning the rise of loans denominated in lei to the population, just like they were there before the crisis at the end of last decade. Nothing was done then. Will the NBR have the "courage" to do something now and to risk the "undermining" of the new government's program?

In October 2008, shortly after the default of Lehman Brothers, the Erste Group analysts wrote that "Central and Eastern Europe aren't threatened by the recession", because "the monetary policy and the flexible exchange rate protect them from the foreign turmoil", and "lending will not see a contraction, just a slowdown" (author's note: see the article "Europa Centrală şi de Est nu se va confrunta cu recesiunea, spun analiştii Erste Group", BURSA, 13.10.2008 - "Central and Eastern Europe will not face a recession, Erste Group analysts say", October 13th, 2008).

It is also back then I warned that "Romania will reap storm" in an article by the same title (author's note: BURSA, 10.10.2008), in which I was also proposing solutions to limit the effects of the global crisis on the national economy, solutions which would have allowed the building of a flexible and robust economy. Unfortunately, those proposals are just as appropriate right now.

American journalist and erudite Henry Louis Mencken once said that "democracy is the theory that regular people know what they want and deserve, what they get and then some". After many decades, Mencken's prediction is about to come true in Romania as well. Again.

The road to prosperity through debt-based consumption, will close in 2017.