English
• (Interview with Lucian Croitoru, governor to the Governor of the NBR)
Reporter: Is the current Greek crisis worse than the one of 1929-1930?
Lucian Croitoru: No, but it could become so. It isn"t yet because there are instruments that the crisis can be treated with. Timbergen showed that if the number of instruments is at least equal to the number of goals, than the latter can be reached. The European Union has not yet run out of instruments to use against the crisis, including the one in Greece. Because of this, the recession was not as deep as the one of the "29-33 period. The situation over the world, as well as in Europe, could only be compared to the period of the Great Depression if the problems were to worsen to such a degree that they would exceed the capacity of the instruments available for dealing with them, like it happened then. For instance, in the European Union, just like in the US, the states have responded to the recession by growing their budget deficits. This was reflected in the increase of the average debt in the EU 27 group of countries to approximately 80% of the GDP. In the EU 17 group of countries it has increased to 85% of the GDP. If the necessary adjustments aren"t made in terms of public finance the situation could deteriorate. New increases of the fiscal deficits could not be possible without increasing public debt to levels where the confidence in the perspective of the European economies would deteriorate.
Reporter: How would you describe the European banking system at this moment, given the sovereign debt crisis?
Lucian Croitoru: Obviously, banks which have solid capital positions, which have a limited haircut risk on their sovereign debt holdings (ed. note: the risk of losses when part of the sovereign debt were cancelled) and which have a low dependence on short term financing. The latest stress test made by the EBA revealed that banks are solvent, aside from eight of them, which would require capital increases. But it is also important how the market sees the banking system. You"ve seen the comments made by certain analysts. They believe that the recent rescue plan is the result of the lobbying by banks which have exposure to Greek debt. The banks with the largest exposure to Greece are, in order, French, German and British banks. 30 banks announced their participation in the rescue plan. As investors, they will lose 21% of the current net worth of the debt. While this bears the risk of moral hazard, this action also indicates the ability of these banks to bear losses without deteriorating their solvency. The market criticized the test as being incomplete because it made no assumptions about liquidity. In the current context of sovereign risk the liquidity of the system needs to be watched very carefully.
Reporter: Is there a risk of the Eurozone disappearing?
Lucian Croitoru: There have been many skeptics on the Eurozone both before and after the adoption of the Euro. But the facts didn"t seem to validate their concerns or their arguments, which were predominantly theoretical. Today there are facts that show that the Eurozone depends on the cohesiveness of policies. The Euro is an unfinished project. In order to be powerful, a currency needs to have a cohesion between the monetary and the fiscal policy. The Euro relies on a unified monetary policy, implemented by the European Central Bank. On the other hand, the need for a unified fiscal policy is not met. The EU countries have maintained their fiscal sovereignty. In order to maintain the cohesiveness of its policies, the EU relies on the effectiveness of the financial and non-financial sanctions for the failure to comply with the Excessive Deficit Procedure and of the stability and growth pact. The increase of the importance of the central administration of the EU is now being created through the adoption of the European Semester. Not least, perhaps the role of the center could be enhanced by increasing the budget of the EU, which would help, among other things, to prevent asymmetrical shocks on a country level, through greater transfers and additional stimuli for countries that perform better. Such instruments can only partially substitute a unified fiscal policy. Even though I think it will take some time, the real progress will come when the Monetary Union will also have a unified fiscal policy. It should also prevent the occurrence of situations which the markets view as unconvincing, where corrections are only made at the last minute and are aimed more at effects than at causes. The problems for the Euro can come especially from the taxation angle. For the moment, the recent agreement concluded by the European leaders to support Greece shows that they still believe in the Euro and that they will do whatever is necessary to protect the Euro currency.
Reporter: From Romania"s perspective, how do you see the issue of fiscal discipline in the Eurozone?
Lucian Croitoru: Romania supports the idea of strengthening the fiscal discipline in the Eurozone. But I think that, just as you can"t switch to the Euro before you are ready, you also can"t accept to become a member of the Eurozone if the issues that are affecting the Euro aren"t solved. The need to be well prepared is demonstrated precisely by the Greek crisis. In principle, the situation of a country that is insufficiently ready which is in the Eurozone, resembles that of a country that borrows in a foreign currency: it is borrowing in Euros, a currency which has a monetary policy that is outside the control of the country in question, meaning that the interest rates and the exchange rate can not help in the event of such shocks. In the case of insufficient preparation, such shocks can only be absorbed with high costs in terms of employment or inflation. On the other hand, a country will not want to give up its own currency if the monetary zone does not have a fiscal policy that is set in order or if a credible program to ensure fiscal discipline exists. Sooner or later, countries that do have fiscal discipline will also have to foot the bill for the fiscal lack of discipline.
Reporter: Does the danger of contagion from the Greek crisis still hover over Romania?
Lucian Croitoru: This danger hasn"t disappeared and, in terms of possible sources, it isn"t confined just to Greece. There are other countries which the market believes have fiscal issues, including the United States, which need to raise the public debt ceiling. The aid scheme given by the EU sought to reach three goals suggested by many analysts: to lower the burden of the Greek debt, to involve the private sector in bearing the costs and to protect against contagion. To a certain extent, the scheme does meet the three objectives. Still, the increase in the cost of the new short term loans for Italy and Spain, just a few days after the agreement shows that the market has some doubts over the last objective, at least. That is why the scheme must be implemented quickly. Concerning the new objective it needs to be said that many things need to be done in Greece, Italy, Spain, in terms of fiscal adjustments. These countries have already taken a series of steps in this respect. Even though the scheme was generally well-received by the markets, new turbulences can arise at any time. If the eventual fiscal adjustments aren"t significant enough and/or a lower participation than the one agreed to by the banking system, or at any rate a combination between the two could cause further problems. In such a case, a lot more money could prove necessary for Ireland and Portugal, in which case the EFSF would need to have its capital increased itself. Some analysts consider such a scenario to be quite likely.
Reporter: How exactly could we be affected?
Lucian Croitoru: Due to the adjustments made in 2009 and 2010 we are better placed today to handle a wave of the crisis than we were in 2008. In theory, in Romania, the contagion could come through any of the existing channels: government bonds, the financial sector, exits from certain assets, trade. We have seen how these channels work in 2009. In the context of the sovereign debt crisis, I think we could have specific issues pertaining to the first two channels. On the route of government bonds, it would increase the cost of public borrowing, pushing the public sector to borrow more from the domestic market, which would lead to the eviction of the private sector from the lending market, causing a slowdown in economic growth. On the financial sector route, what worries me the most is how the Romanian public will react. If people were to find out that a Greek bank that is present on the Romanian market is having difficulties at home, I think there would be a wave of panic, despite the fact that there would be no real reasons to worry. Panic can destroy even the best bank in the world.
Reporter: How is the NBR preparing to handle such a contagion?
Lucian Croitoru: The NBR has a strategy in this respect. The NBR knows how important liquidity is under such circumstances. It also knows how important is for every entity in the system to have a hedge on its positions tied to the areas which could represent a source of contagion. Finally, it is well known that instruments that can be used against a certain situation must be clearly defined and available in the adequate proportion. All these elements are part of this strategy.
Reporter: What impact would the maintaining of the US debt ceiling have?
Lucian Croitoru: The US is one of the main engines of the global economic growth. Maintaining the ceiling in place would amount to reduced spending. For instance, a reduction of wages in the public sector or of investments, would lead to a slowdown of the economic growth. This would have implications on a global level. For us a slowdown of the global economic growth could result in a slowdown in exports at a time when consumption and investments no longer don"t have any traction. Even the insufficient raising of the ceiling would have implications, because it would amount to a postponement of the solution to the problem, instead of solving it. The uncertainty wouldn"t disappear, and the market would include the cost of that uncertainty in its decisions.
Reporter: How solid is the Romanian banking system in Romania, given the fact that the profit of the banking system fell to 95 million lei in June, down from 373 million lei in March?
Lucian Croitoru: The solidity of the banking system does not depend on its profitability at a given moment. The crisis has created problems in the real sector and thus, the banking system had to setup provisions for non-performing loans. This has reduced profitability, but has protected the solidity of banks. Romanian banks are well capitalized and liquid. Furthermore, their exposure to the public is limited almost exclusively to Romania.
Reporter: Ratings agency Fitch has announced that the number of non-performing loans will reach a maximum at the end of 2011, but at the same time expects that consumer lending will resume. Can we afford to be optimistic?
Lucian Croitoru: It is necessary to remain cautiously optimistic. This would help us to avoid going from one extreme to the next, and the accelerations which exceed the ability of the various entities to adapt to new conditions. For several months now, consumer loans measured over 12 months back shows a slowdown in its contraction. This trend will cause the pace of borrowing to pick up again soon enough. Loan refinancing is the first factor that contributed to this. They have provided indebted consumers with a respite. The next support will come from the resumption of the growth in real salaries, gradually in sectors that will recover.
Reporter: Will we see interest rate cuts, like the governor of the NBR said?
Lucian Croitoru: It is possible, and it may even become necessary. If they are going to be implemented just the way they have been implemented now, and if inflation on the demand side will abate, the policies will make inflation go down and this will make it necessary to lower the interest rate on loans. If the nominal interest rates weren"t cut as inflation is going down, the real interest rates recorded ex post would become increasingly bigger in real terms, which would make debt become increasingly burdensome, causing consumers not want to borrow anymore. Banks would obviously not want that, since their future depends on the resumption of lending in the private sector. They will adapt their offers, including by adjusting their interest rates.
Reporter: Jeffrey Franks thinks that the NBR should strengthen the monetary policy, but he thinks that this should be done later. What is your comment on this statement?
Lucian Croitoru: There was a time when the increase in the price of food and oil posed the risk of second round effects due to an increase in inflationary expectations. Meanwhile however, the increase in the price of foodstuffs products has significantly abated, and it seems that this trend will continue. In the case of Romania, foodstuffs are an important component of the core inflation. Thus, even core inflation will tend to fall. Aside from these prices, the decision to strengthen the monetary policy will depend on several factors, of which capital flows play an essential part. In theory two scenarios are possible. The first would be that the global evolution would determine an increase in the pressure for net capital outflows from Romania in the second half of the year. This would determine the need to raise the policy rate in order to temper the depreciation of the leu and the inflation that comes along with it. The second scenario would be, the opposite: the global evolutions and the fundamentals of our economy causing the increase of the net capital inflows. And this is where we have two possibilities. The first: capital inflows would be relatively big and would cause the leu to strengthen, making it likely that the economy would overheat. In this case, we would be faced with the dilemma of the interest rate, like we were in 2006-2007. The second: capital inflows would be moderate, meaning that the leu would gain slightly and the economy wouldn"t overheat, like it did between 2000-2004. This scenario would be more compatible with an eventual loosening of the monetary policy. The first scenario could become more plausible only if the sovereign debt crisis were to escalate. Regardless of which scenario were to occur, I think that adequate liquidity management would remain the key to successfully meet the inflation target for 2012.
Reporter: President Traian Băsescu claims that there is no further need for austerity measures. Would this decision be sustainable?
Lucian Croitoru: Austerity isn"t a goal in itself. It is a tool to bring aggregate demand to sustainable levels. Cutting 25% off the wages in the public sector in 2010 wasn"t a goal, it was just a way of lowering excess government demand. Once demand levels become sustainable, austerity becomes counterproductive because it lowers economic growth below its potential, and the living standard along with it. Over the long term, the strategic objective of the economic policies is the sustainable growth of the living standard towards the average level of the EU. But that objective can"t be achieved when you"re wasting resources. For instance, in the healthcare sector, the sector that the president himself has discussed, there is a mechanism which allows arrears to continue, which indicates that consumption is above the sustainable level. Also, the objective to raise the living standard can"t be achieved when investment spending is being cut every year. It is wasteful to finance an unsustainably high welfare bill, at the expense of public spending on infrastructure and other areas specific to the public sector.
Reporter: He has also said that Romania has no need to draw the money from the IMF this year and that we can finance ourselves from the private markets. Is this the adequate solution for us?
Lucian Croitoru: The precautionary nature of the agreement with the EU and the IMF means that we will only use their resources if we were forced to so do because something has gone wrong. Otherwise, it is preferable to borrow from the markets, as is the usual practice. Financing from the market with normal risk premiums shows investors that we are on the right path. It is a factor that instills confidence. It is a good thing to be present on the markets, to make sure they don"t "forget" about you, because if they do, the cost of borrowing increases when you go back to the market.
Reporter: Does the international context allow us to go out on the international markets with a new EMTN program at better rates than in June?
Lucian Croitoru: There is an ongoing program for borrowing using EMTN. In June, the coupon was 5.25%, and the CDS rate was 2.59 percent. Right now, the CDS is 2.38 percent, which would indicate a lower cost. But the true cost of a new loan from the market will be set when the decision to borrow will actually be made. It will depend on what the market conditions will be like at that time and on the maturity of the loans.
Euro
Dolar SUA
Franc elveţian
Liră sterlină
Gram de aur
