The crisis of the budget could lead to a rise in interest rates

The current problems of the Government resulting from the need to cut budget spending increases the risks of banks, which, after being forced to cut the interest rate to match the policy rate, are now charging higher interest rates on government bonds and even for consumer and corporate loans, as bankers feel that the yields have already reached bottom.

"We have anticipated that the interest rates would drop and we invested in a wider range of products, not just here in Romania. We need to adapt to an environment with dropping interest rates. Low interest rates will affect our revenues, in particular by causing a drop in the yields of government bonds", said Dominic Bruynseels, CEO of BCR.

He said that the bank is still making money from the high yields of government bonds, as most of the bond portfolio was built in the last two years.

Bankers say there is no more room to cut interest rates, and the increasing risk of default could even cause them to rise. "I think that the interest rates for loans, have already reached the lower limit, and there"s not much room for them to go down, taking into account the fact that the crisis has lowered the need for banks to compete with each other", the chairman of BCR said.

The average interest rate for loans denominated in loans stood at around 12.5% a year, compared to 16% in December, while the interest rate for deposits had dropped to 7.25%, slightly above the policy rate set by the Central Bank. However, over the last few months, banks have begun promoting real estate loans and even consumer loans in lei, an interest rate below 10%, more specifically 3-4 pp above the policy rate set by the NBR, just as the governor of the BNR had anticipated.

Concerns on the local fiscal reforms could limit the likelihood of a significant drop in government yields, at least in the short term, ING analysts say, who think that the Ministry of Finance is expecting an improvement of the market for government bonds, in line with other markets in the region.

"Despite our expectations, the Ministry of Finance on Thursday rejected all the bids received during the auction for 3-year government bonds. This was the second bonds issue that was failed, even though the Ministry of Finance accepted to pay higher yields (60 bp) in the auction for 6-month treasury certificates in the beginning of the week", said Vlad Muscalu, economist with ING Bank.

Two government bonds auctions are a strong sign that banks are becoming increasingly demanding, as interest rates for loans have seen a major decrease.

The Ministry of Finance has rejected all the banks" bids for 3-year government bonds auction put up for sale on Thursday, as it considered the bids which were being demanded were too high. The total demand from banks stood at 1.24 billion lei, while the Ministry was looking to raise 900 million lei.

"At the next government auction for 7-year bonds it is possible that the yields would be comfortably above the previously offered yield of 7.09%. So, for the moment, we may see another failed auction", ING bank analysts say.