It"s Official: Traian Basescu: We Are Going Into Recession, BNR"s Optimism Is Unwarranted

Ana Săbiescu

The National Bank"s optimism about the economy is groundless as far as the near future is concerned, as Romania will incur a plunge in the Gross Domestic Product in Q2 and go into recession, President Traian Basescu told a an emergency Government meeting called by Premier Emil Boc.

"Although I do not have the final facts, my opinion is that the optimism displayed by BNR in April is not grounded in the near-future projections. The downturn will continue in the second quarter, which means, by any standard, that we will have a full-fledged recession," President Basescu said. Despite the grim predictions, he added: "Based on the premise that we are partners in hardship, I want you to be assured that I continue to be the Government"s partner until the crisis is over, hoping that it will be over in due time." President Basescu"s forecast is that the economic decline will be under control in the third or fourth quarter of the year.

Another negative budget rectification is very likely to occur in August or September, according to President Basescu, who warned the ministers attending the Government meeting not to go beyond the salary budget hoping for positive effects of the forthcoming presidential elections, because there was a major risk not to be able to pay salaries in October. "If we take money from the loan given by the International Monetary Fund, we face the risk of triggering an economic and social slippage. The loan is not for salaries, but for investments," President Basescu said.

The extraordinary Government meeting held on Sunday was attended by President Basescu as an exception. The agenda included the details of the "First Home" programme designed to assist the public to buy a first home, as well as several measures regarding administrative decentralization. The interest rate offered to beneficiaries of the "First Home" programme should be set at 5% for EUR-denominated loans, considering that the banks" money will be entirely guaranteed by the State, President Traian Basescu said, after having repeatedly expressed discontent with the banks" attitude and the interest rates they charged.

"Starting from the premise that the Romanian banking system has a great surplus of financial resources at the moment, but still charges very high interest, my suggestion would be that you agree on a interest rate around five percent for euro, if not five percent precisely. The banks wishing to place their money in this programme for five percent are welcome, because it is a five percent interest on a State-guaranteed loan," the President explained.

Having economic recovery in mind, President Basescu also suggested lower interest rates in general and the restructuring of Romania"s short-term debt. "I suggest to the Ministry of Finance to proceed with restructuring the debt, because the current debt is short-term debt and we need to move to medium- and long-term debt. This means that we need to absorb the foreign exchange surplus, the euro surplus from the banks," he said. He also said that the interest rate paid by the Finance Ministry should also be approximately 5% for medium- and long-term loans.

President Basescu urged the National Bank to be more predictable and have close discussions with the commercial banks regarding the reduction of the minimum mandatory reserves and, implicitly, the reduction of the amounts of money (i.e. forex) that banks are compelled to keep with BNR. "All Members of the Government should know that the BNR reserves contain nearly 12 billion EUR plus 6 billion EUR in RON equivalent. This is not BNR"s money, it"s the commercial banks" money," he said. Nevertheless, the President emphasized that the National Bank should be cautious when releasing the money from the reserves in order not to fuel the inflation and affect the exchange rate and thus jeopardize the adoption of the euro in 2014.