Public sector workers could go from privileged borrowers to possible loan delinquents

The decision to lower wages in the public sector by 25%, that was announced on Thursday by president Traian Băsescu could lead to an increase in the number of people that would default on their loans, experts say.

Ruxandra Andrei, general manager of the loan comparison portal "Finzoom", said that until recently, public sector workers would get additional points on their credit rating, when applying for loans: "Most of the time they would be considered as less likely to default, due to their steady sources of income, a situation which has changed in the meantime".

The solutions that banks can resort to in this situation are either lowering the interest rate for ongoing loans, rescheduling payments or awarding a grace period for people who have trouble making their payments.

Cornel Cojocaru, the spokesperson for BCR, said banks can not lower the interest rates for ongoing loans, due to the interest rates that they borrowed at themselves.

On the other hand, Ruxandra Andrei said that since the beginning of the year, several banks have already lowered the interest rates for loans.

The representative of Finzoom advises those who have trouble making their loan payments to try and negotiate a rescheduling of their loans or the granting of a grace period: "Banks are willing to reschedule. People who are unable to make their payments, should notify the bank right away, without any delay, because overdue loan payments would fall under the incidence of the debtor regulations of the NBR".

The Finzoom representative presented one such example of family in which the husband, who was a public sector worker, took out a loan under the "First home" program together with his spouse. The man"s salary has now been cut to 1,000 lei, as he is no longer receiving performance bonuses which increased his revenues to 2,500 lei.

If the salaries of public sector employees get cut by 25%, as recently proposed, the man"s income would be 750 lei.

• Rozalia Pal, Unicredit Ţiriac: The decrease in pensions and unemployment aid will not have any impact on the quality of the banks" loan portfolios

The cuts in pensions and unemployment aids (which were announced on Thursday by president Traian Băsescu), would not have any significant impact on the quality of banks" loan portfolios, because these types of people have few ongoing loans, said the chief economist of Unicredit Ţiriac, Rozalia Pal. She added: "However, the drop in salaries could have such an effect, but we have to wait and see how the measures which were announced will be implemented in practice".

The official of Unicredit feels that the announced downward adjustment of the public sector could help the private sector recover: "An increase in taxes would have directly affected manufacturing, by putting additional pressure on the private business environment and endangering the chances of economic recovery".

• Liviu Andrei, Alliance Finance Broker: Banks will become wary of lending money to public sector workers

If the reduction of the salaries of public sector workers is implemented, banks will become wary of lending money to people in this sector, feels Liviu Andrei, the general manager of loan broker Alliance Finance Broker (AFB).

"It is the lesser of all the evils that could have happened (ed. note: the cut of the wages of public sector workers, instead of an increase in taxation)", he said.

The official of the AFB said that he expects an increase in overdue loans in the near future once the salary cuts will be enacted. Under these circumstances, the banks will not lower the interest rates for the loans currently in their portfolio, but will offer grace periods and rescheduling of payments.

• Liviu Voinea, Group for Applied Economics (GEA): The cutting of wages in the public sector could lead to a rise in interest rates

The cutting of the wages of public sector employees could cause banks to raise interest rates, considers Liviu Voinea, the executive manager of the Group for Applied Economics (GEA).

One hypothesis is that banks could hoard their cash, opting instead to lend money to the state, which means money would become scarce on the market and interest rates would increase, said Voinea.

The representative of the GEA said: "Slashing 25% off the wages of public sector workers is a very bad decision. There will probably be many borrowers who will have problems paying back their loans, given the fact that they borrowed money based on their current higher incomes.

This will affect both public sector workers with ongoing loans, as well as their guarantors working in the public sector. It will be difficult to get lending to resume, in particular for public sector employees".

Liviu Voinea considers that raising VAT would have been far less harmful than the wage cuts, which will lower household consumption, affecting private businesses.

"The thing that should have been done in the last year and a half was to cut public procurement spending, which are comparable to those incurred with wages in the public sector ", considers Liviu Voinea. He added that the big wages are in the army, the police and secret services (over 50%), while most of the remaining public sector workers are employed in education and healthcare, whose wages have already been lowered at the end of 2009, through the law of unified wages.