Popa: The worsening of the sovereign debt crisis will affect the risk premium and the exchange rate

The worsening of the sovereign debt crisis in the Eurozone could result in increasing investors' aversion to all markets, including emerging ones, Cristian Popa, the deputy governor of the National Bank of Romania, at a seminar concerning inflation. He explained that the effect would carry over to the risk premiums (CDS-Credit Default Swaps) which may rise and also, there will be pressure on the exchange rate.

The deputy governor also said that the possibility of Western Europe experiencing economic growth is extremely low: "I don't know if there will be a recession or not over the short term. We may have significantly lower growth figures in the first part of 2012 than the ones that were initially estimated a few months ago for the region".

A far lower growth dynamic abroad will affect the level of economic activity, as well as the aggregate demand in various countries, as well as in Romania, according to him.

Cristian Popa said that Romania took the first step towards a possible fiscal union, by participating in the Euro Plus pact and through the fact that it intends to meet the target for exiting the excessive deficit procedure, namely the year 2012.

As for the talks at the level of the European Union concerning a potential fiscal union, the deputy governor of the NBR considers that we should wait to see the decisions made by the European Council which is set to meet on December 9th, to find solutions for the crisis in the Eurozone.

He says that Romania is doing better than other countries, as it plans to have a budget deficit of 1.9% in 2012 and a balanced one in 2013. Still, reaching these kinds of targets depends heavily on the level of growth, not just on the way the fiscal administration is conducted, according to Cristian Popa.

The Deputy Governor of the NBR said: "On that matter, we still have to wait and see how the economy of the Eurozone and of the EU evolves, beyond the evolutions specific to Romania. We see some short term risks to the forecast of 1.8 - 2.3%, which the IMF also made on its last visit, if the economic growth in the Eurozone were to prove weaker than the one that was forecasted".

The governor declined to discuss the drop of the currency reserves of the NBR, in November, as well as the interventions of the NBR on the exchange rate.