Romania"s national drama, caused by creative accounting

The cut of the pensions and salaries comes from the fact that the IMF did not accept the rollover of debt, as practiced by the Romanian budget.

In the talks with the IMF (which took place last Wednesday - when no one, not even our team or the mission of the IMF, could know what new measures would be implemented, even though the mass-media presented the hike of the VAT and of the profit tax as certain) the defining moment occurred when the parties realized they could not agree on the size of the budget deficit; the Romanian side claimed that our budget would not exceed 6.9% at worst, whereas the IMF claimed that the deficit would reach 9.9% at best.

The answer comes from differing accounting procedures.

The Romanian side did not include in the deficit the interest on the loans it took out from commercial banks (government bonds) because they had rolled them over into the next year; once the maturities came this year, instead of paying off the loans and their interest, the government issued new bonds which covered the cumulated amounts it owed.

And this is how, they managed to slim down the budget deficit by roughly 3%, because they did not include the loan.

They only included the interest.

• The budget"s Ponzi scheme

At the end of 2008, Romania"s GDP was approximately RON 550 billion, and the budget deficit stood at 5.5% of the GDP, meaning 30.2 billion RON.

In 2009, the Ministry of Public Finance borrowed money from the domestic banks to finance its deficit, at an average interest rate of 14%.

In 2010, as they were not able to pay back the principal and the interest rates, they rolled them over in 2011, and borrowed money again at an average interest rate of 8%, for the same deficit as in 2008.

In total, for the deficit of 2008, at the end of 2010 we would be required to pay approximately 6.6 billion RON.

In 2009, for a GDP of approximately 500 billion RON, the Ministry of Public Finance had a deficit of 7.9% of the GDP, (39.5 billion RON). IN order to cover it, in 2010 it will pay on average 8% interest, which means another 3.1 billion lei.

So in total, over the course of the two years, just for the deficits of 2008 and 2009, we would have been required to pay a total of approximately RON 9.7 billion.

But in 2010, the government discovered the Ponzi scheme and did not include the interest rate for the previous deficits (all countries that make long terms loans pay the interest every six months and include them in the calculation of the budget deficit, unlike Romania which made 3 or 6 month loans and rolled over the interest continuously).

By rolling over the RON 9.7 billion for 2011, the Government hoped that the IMF would believe its figure of a maximum of 6.9%.

But this year, the IMF is extremely careful with its money, because next year the grace period will expire and they expect to be paid the 3.8% interest on the EUR 20 billion it lent us, which would entail the payment of roughly 1.52 billion Euros (for two years back).

That is why it said "Stop!", when it found out that in 2011, the interest owed alone would amount to RON 15.7 billion.

To say nothing of the fact that this year"s deficit would need to be financed in 2011.

This means that 2011 will begin with a deficit of roughly 3% of the GDP.

Precisely the difference between the 6.9% claimed by the Romanian government and the 9.9% claimed by the IMF.

• It would have been even worse next year

The 3% that vanished from this year"s budget, would have come back next year into a budget deficit that the IMF feared we could not bear.

And since under no circumstances would it want to be left hanging when it comes to getting its money back, the IMF forced us to eliminate the creative accounting and to make sure that it would get its money back.

The IMF is less interested on whether taxes or VAT are raised or pensions and wages are cut.

What it wants is the money!

That"s the reason your mom and dad are crying now.