Political Instability May Increase Risk Of Loan Defaults

Political instability, which bankers, analysts and businesspeople agree is the greatest threat for Romania"s economy, continued over the weekend, with the Central Electoral Office deciding on Friday to recount annulled votes in Romania"s presidential election, according to the decision of the Constitutional Court. The recount confirmed the news that sitting President Traian Basescu keeps his narrow re-election victory.

Apart from the delay in the foreign financing program, "the biggest harm" has been done to the population and domestic businesses, which are heavily indebted in Euros. Analysts expect the leu to weaken at the end of the year.

Estimates of ING analysts put the exchange rate at 4.35 lei/Euro over a month, whereas by the end of Q1 2010, the leu is expected to reach 4.45 units/Euro.

"The likelihood of a weaker leu in Q1 2010, arises first from political risk, and because the Central Bank may choose not to defend the exchange rate or else risk having interbank interest rates exceed 100%", the quoted report says.

According to Rozalia Pal, senior economist of Unicredit Tiriac Bank, the bank"s reviews estimate an exchange rate of 4.3 lei/euro for the end of this year, and 4.4 lei/Euro for the first quarter of 2010.

Foreign currency loans taken out by Romanian households and companies amounted to 122.54 billion lei, at the end of October, 60% of the total, according to data by the Romanian Central Bank, of which corporate loans accounted for 58.41 billion lei.

The Romanian Credit Bureau has approximately 7 million borrowers on record (ed. note: - debtors with loans under 20,000 lei), according to a statement made in October by its General Manager, Şerban Epure. Also at the end of October, the Romanian Banking Risk Bureau (ed. note: which tracks exposure equal to or exceeding 20,000 lei for a single debtor) had 996,225 corporate and individual debtors on record.

All of them are the ones affected the most by the political instability: the greater evil which makes the lesser evils - such as freezing lending and increasing unemployment - worse.

Borrowing costs are increasing beyond the initially contracted levels. Individuals as well as companies are at risk of being unable to pay back their loans. A risk which bankers are certainly unhappy with.

• Borrowing costs for the State are rising

Continuing instability does not help the state, which has to plug the budget deficit, using other means than the foreign loans, the disbursement of which has also been put on hold due to the political situation in Romania. Borrowing from the domestic market remains the only chance for the Ministry of Finance, after the political uncertainty cut its access to cheap foreign loans, by forcing it to put of the 500-1000 billion Euros Eurobonds issue initially scheduled for this autumn.

Kenneth Orchard, analyst with Moody"s Investors Service, considers that interest rates at which the Romanian government is borrowing may increase temporarily, lacking a government that will continue the implementation of foreign agreements.

The disbursement of the third installment of the foreign loan from the IMF (1.5 billion Euros), as well as the one from the European Commission (1 billion Euros) was postponed after the dismissal of the government sparked a political crisis.

• The IMF is coming to Bucharest

The experts of the IMF and of the European Commission will arrive today in Bucharest, in order to work on the draft budget for 2010, officials of the Ministry of Public Finance said.

"This will be a very short mission, of one to three days at the most, for completing the 2010 budget", said Mihai Tănăsescu, as quoted by NewsIn.

He said Romania may ask for some reprieves "according to the new deadlines", as arrears have exceeded the levels agreed upon with the IMF, in the second and third quarter alike, and the unified law of pensions must be passed by December 31st.

Tănăsescu said there are no risks of the Romanian state running out of funds without the third installment of the IMF loan, saying that "the Ministry of Finance probably raised exactly the amounts it needed".

The IMF official for Romania, Tonny Lybek, last week said that the Fund would remain firm on the 5.9% deficit for 2010 even if the political crisis were to continue. He mentioned that the budget deficit target agreed upon with the Romanian authorities is "big enough as it is", and said the IMF was extremely flexible in its talks with Romania.

However, the IMF official said meeting the target of 5.9% of the GDP is not enough, saying the IMF is also interested in how expenses are structured.

At the end of November, the budget deficit reached 6% of the GDP, according to the first evaluations made public by the Ministry of Finance.