INSTEAD OF FINANCING THE PRIVATE SECTOR, Banks Rush To Finance Ministry Securities Auctions

• Finance Ministry offer 43% overbid

The Finance Ministry is borrowing more and more often from private banks to finance the public debt through discount T-bills and benchmark bonds bearing an annual average yield of approximately 11-12%, which seems to make banks extremely eager to buy as many as they can.

As the financing lines from the parent banks have been shrinking, the foreign-owned Romanian banks are using most of their liquidities to buy State securities, which generate a yield of up to 12%, but are much less risky than any loan to individuals or companies. The banks prefer to place their money with the Finance Ministry due to the firm guarantee that they will see it back, rather than run the risk of simply increasing their bad loan portfolio.

According to Daniel Ionescu, Doctor of Economy, the Finance Ministry is probably paying overdue debts to the private sector with the money thus borrowed from private banks. In his opinion, the banks would like to finance individuals and private companies, but the current market risk requires more prudence. One solution would be to have State guarantees for the private debt.

Since the beginning of March, the Finance Ministry has borrowed 1.7 billion EUR through three auctions. The overall value of the banks" bids amounted to 2.43 billion EUR, by 43% more than the Ministry"s target. The Ministry"s intends to borrow a total of 7.5 billion RON (1.76 billion EUR) in March through State securities issued to finance or re-finance the public debt. Judging by the dates and the amounts collected by the Ministry through the three issues of State securities, the target is almost completed.

The Finance Ministry can also afford to decline some of the banks" offers: early this month, the Ministry rejected all of the private banks" bids for 5Y benchmark bonds because the yield they expected was unacceptable. The issue was worth 250 million RON, with an interest of 12.05% and a coupon rate of 11.25%. The Ministry"s need for money is a consequence of the high budget deficit logged at the end of 2008, that is, 4.5% of the gross domestic product by Romanian accounting standards or 5.21% by EU accounting standards.