THE GOVERNOR OF THE CENTRAL BANK OF ROMANIA: Romania would have borrowed at a much higher cost if it hadn"t resorted to the IMF loan

Ana Săbiescu

The option of this financial arrangement with the international financial institutions is obviously a good one, if we look at its costs, Central Bank governor Isărescu explained yesterday, adding that Romania would have been forced to borrow money at a much higher cost if it hadn"t reached an agreement with the International Monetary Fund.

"If Romania had borrowed 12 billion Euros now, it would have done so at much higher costs on the international markets and moreover, it would have had limited access to these markets, despite the fact that interest rates have fallen", the Central Bank Governor said.

Mr. Isărescu added that all of last year"s loans for funding the private sector, were taken on at an interest rate of approximately 4 - 5% per annum.

The interest rate on the IMF loan will be approximately 3.4 - 3.5%, the Governor said, adding that, right now, the interest that the Central Bank pays for banks" minimum mandatory reserves is 2.9%, but it is seeing an upward trend.

The loan agreement negotiated by Romania with the financial institutions amounts to 19.95 billion Euros, with 11.8 billion de euro drawn this year, an additional 7.1 billion euros next year, and the remaining 1.05 billion Euros in 2011, according to Mr. Isărescu.

8.5 billion Euros will come from the IMF, 2.5 billion Euros will come from the European Commission, around 0.5 billion Euros from the World Bank, and an additional 0.3 billion Euros from the European bank for Reconstruction and Development, to be used for various projects.

Mr. Isărescu said: "This year"s numbers match the estimates that Central Bank officials were suggesting as well. In the most optimistic scenario, the funding deficit was an estimated 7-8 billion Euros, whereas in a pessimistic scenario it could reach 14 billion Euros".

In the event we succeed in attracting the money from the European Investment Bank, Romania"s funding package will exceed 20 billion Euros. Mr. Isărescu said Romania might receive funding for projects worth 1.5 billion Euros a year from the EIB. Despite the latest forecasts and "prophecies", and considering this foreign loan, the Governor of the Central Bank is optimistic and feels that "Romania"s economy will remain in a positive area this year".

• The Central Bank is looking to stabilize its foreign currency reserves

As the money from the foreign loan taken on comes in, the Central Bank intends to stabilize and even increase Romania"s foreign currency reserves by 2011.

"Don"t expect that, simply because 8 billion Euros from the IMF and the money from the European Commission will be going to the treasury, the foreign currency reserve will increase by 11 billion Euros, because that"s not what"s going to happen. Through our loan agreement, we are looking to stabilize and slightly increase the foreign currency reserve by 2011", Mr. Isărescu said.

The funds borrowed from the European Commission and drawn this year (2.5 billion Euros) will be used to fund the state budget deficit, but in the end, they will go into the market. Meaning that, the equivalent of this amount might reach the foreign currency reserve, because the Central Bank would buy foreign currency through swap operations.

• The structure of the Minimum Required Reserves for foreign currency denominated liabilities may be changed

Also, following the commitments made in taking out the aforementioned foreign loan, the Central Bank will lower the level of banks" minimum required reserves for foreign currency denominated liabilities, "extremely gradual", the Governor explained.

"Don"t think we"re going to cut the minimum mandatory reserves for foreign currency loans from 40 to 20%. The adjustment will be extremely gradual, because the economy can"t absorb too much liquidity", he added.

The Central Bank may reduce the minimum reserve level through a modification of their structure, and not by reducing their percentage. To this end, there is the possibility of not including long term liabilities in the calculation base for the minimum required reserve in order to support long term lending and to ease banks" discomfort.

The Governor explained: "We won"t change the percentage, but we may change the structure. We are going to start with the foreign currency reserves, for lei, liquidity levels are showing a slight improvement, through the REPO operations that the NBR performed, in order to, among other things, stimulate the funding of the budget deficit ".

Right now, the level of the minimum mandatory reserves set by the Central Bank is 18% for liabilities denominated in lei and 40% for liabilities denominated in foreign currencies, and the reserves for banks" foreign currency liabilities are included in Romania"s international reserves, managed by the Central Bank.

On the issue of the exchange rate, the Governor of the Central Bank explained that the former has reached a sustainable level, especially for the current period. Yesterday, after the IMF loan agreement was announced, the leu rose 1,15 bani, with the reference exchange rate going down to 4.2726 lei/Euro.

• By the end of the year we may switch over to the new accounting norms

By the end of this year, the Central Bank may switch to the new international accounting norms, thus lowering the level of provisions that banks are required to create for bad loans.

"We are considering switching over to the new accounting norms by the end of this year. It is because of these regulations that bigger provisions were required. The amendment is on the agenda", Mr. Isărescu said.

Recently, the Central Bank offered banks the first "favor" by revising the norms for the creation and use of provisions, for loans with arrears exceeding 90 days.

The new regulation allows banks to reduce the level of provisions by at most 25% of the value of 25% of the collateral, as opposed to the previous regulation that did not allow adjusting provisions for loans with payments outstanding for more than 90 days.