The insufficient funding of companies - the major issue for this year

Reporter: Mr. Sebastian Vlădescu, what is your opinion concerning the huge losses suffered by the Romanian banking system in 2012 and what repercussions do you feel they will have on the Romanian economy?

Sebastian Vlădescu: I think that we have a major problem when it comes to the losses posted by the banking system in 2012.

That is why I think that this should be the first chapter to be read from the February draft of the letter of intention to the IMF.

After rolling over non-performing loans for three-four years, lenders are now acknowledging their losses, which are reflected in the clearest manner possible, in the contraction of lending.

The letter of intent itself includes the recommendation of the IMF for the banks to stop doing that.

I think that it is a very serious phenomenon and I think that this will be the major problem of 2013.

By overlapping the accumulation of provisions and later losses, in the banking system, with the reduction of the financing lines from the parent banks, we have a big process of lending contraction, which, for the Romanian companies translates into serious problems in the day-to-day operation.

What is happening now is actually the repercussion of the excessive lending in the period of economic boom of the Romanian companies.

The adjustment from the excessive level of 2007-2008 all the way to the level of functionality of is a process which, in the 2009- 2010 period, has been postponed or avoided, in the hope that the crisis is less dangerous, less durable, less deep ... Which wasn't the case.

We need adjustment and it necessary that the Romanian companies restructure their operation in the markets, depending on demand and supply, in conditions of efficiency.

The current lack of funding and the fact that they have received financing using overpriced collaterals will lead to increasingly high problems for companies. This process will unavoidably lead to insolvencies, which are part of the trend nowadays, but which are very dangerous, including for the banking system.

Reporter: We are used to insolvency.

Sebastian Vlădescu: The moment you get used to insolvency you eliminate another financial flow, and you lose the payments from the insolvent companies.

If you are a somewhat functional company, you start getting major cash-flow problems and you try to compensate for them by borrowing from banks.

But the banks will ask for all kinds of collaterals, the borrowing costs are very high and then the solution for your company becomes to file for insolvency, which will snowball and cause the insolvency of others.

When that happens, we will have an insolvent, non-functional economy.

The process will speed up in the coming period and we will see the number of companies filing for insolvency will be much greater than it was in 2012.

This will be one of the major problems of the economy related to the decrease of lending and the accumulation of losses in the banking sector.

Reporter: There are Romanian banks, such as Banca Transilvania for example, which had very good results, but foreign banks posted losses. How do you explain this phenomenon?

Sebastian Vlădescu: The domestic banks did not have sufficient resources to expose themselves, the management had a cautious policy, as the resources were limited.

As a result, being more conservative, they are not posting losses now like the banks which had greater exposure.

On the other hand, over the last few years, the foreign banks have brought billions of Euros to the Romanian market.

Reporter: But they have also withdrawn some money from Romania ...

Sebastian Vlădescu: Now the process for the return of the money has begun, and there is nothing to offset that.

CEC or Banca Transilvania have risen lately in the ranking of the banking system, from the 10th-12th positions, to the 3rd-5th positions.

Seven years ago, Banca Transilvania couldn't have even dreamed about such a ranking.

Having very small share capitals, the ability of CEC Bank and of Banca Transilvania to expose themselves to one single customer was and remains very limited.

Reporter: Romania's inclusion in the JP Morgan index has been very well received by investors, with the recent bonds issue denominated dollars being a success. This proves that investors have confidence in Romania.

Sebastian Vlădescu: Romania is a nice case to present to investors.

Romania is certainly more reliable today then it was six or eight months ago. A government with a comfortable majority in the Parliament, the agreement with the IMF - those are good signs for investors.

At the moment, in the market, there are trillions of dollars which have nowhere to go, and one billion dollars doesn't mean almost anything.

It's natural that those who have billions to invest, invest in Romania once they've seen its presentation.

On the stock market, there are tens of billions of dollars being lost in two days. The fact that there are investors who risked 1-2 billion dollars investing in Romania is not significant.

In terms of volume, it is very little.

Those investors represent a world where they don't even understand each other, nobody understands them, nobody knows how it works.

The belief that investors are special, that they're geniuses, is wrong. In fact they act like some hysterical women that run and buy what they hear is in fashion.

Reporter: What will be the country's situation if the government alliance breaks and we lose political stability?

Sebastian Vlădescu: We will adapt. We have a "buffer" which still exists and if something were to happen, we could afford to finance ourselves for a few months and restore political stability.

Reporter: Lately, on TV at least it looks like there is a war within the USL.

Sebastian Vlădescu: The USL is unnatural and I don't think it is a functional alliance. It will probably break eventually.

I find it very hard to believe that the PSD - a solid, consistent party, with a big national organization and which is very attractive to the public, and which far surpasses the PNL - will accept taking the risk of a liberal president in Cotroceni.

Especially what happened with Traian Băsescu over the last 8 years, I don't think that the PSD will agree to have a president that would tell them: "I want to appoint X as prime-minister!"

Reporter: Crin Antonescu is getting ready to enter the race for the Romanian presidency, but he also wants to amend the Constitution, to reduce the prerogatives of the president. Isn't that nonsensical?

Sebastian Vlădescu: Not necessarily, especially for someone who loves Romania ...

Crin Antonescu is handling the amendment of the Constitution by which the powers of the president will be diminished and he wants to be the president of Romania!

If the head of the PNL believes that the current power structure defined by the Romanian constitution is wrong and he is part of an agreement to bring in another structure, a Romania that would no longer have a semi-presidential or indefinite presidential power, going for a parliamentary republic where the president has a decorative role, than this position is praiseworthy in my opinion.

It isn't nonsense to dismantle something that isn't working, even if you as a person stand to gain nothing from it. There are some people who are dedicated to their country and they have this inclination towards putting the nation's good above their own.

Of course, there is no journalist that would believe that something like that is possible.

Reporter: Will the government succeed in completing the items included in the letter of intent?

Sebastian Vlădescu: No. We will probably postpone the terms. For example, in the draft I have seen an economic growth of 1.6%, but I don't believe in it.

Reporter: How necessary is a new agreement with the IMF?

Sebastian Vlădescu: Very necessary. If it didn't exist, we would be even less disciplined than we already are.

Reporter: "Real" investors don't really pay attention to us, direct foreign investments have fallen dramatically these past few years.

Sebastian Vlădescu: They have nowhere to invest. A window of opportunity, like when we sold BCR, no longer exists.

I don't think that there are currently any Romanian assets that we can sell and get as much for them as we got for BCR. And I keep thinking that we will be selling cheap for a few years ...

In terms of the money we got from privatizations, it is out of the question. If we were to put Transgaz on the stock market tomorrow, we would get a very low price.

New banks that would get created, and increase their share capital, no longer exist. I think that in the banking system, the process will be the other way around.

In the industrial sector, on principle, there is a surplus of capacity, and I don't think any major investments in the industrial area will be done, because there is no more room.

I don't see any market segment where anybody would want to invest in Romania.

The energy sector could be one such area, but it has many problems originating from the past.

Wind energy is a problem, solar energy will be a problem.

The cost of this energy and the ability of this type of energy to destabilize the system are so big, that the final costs it involves, are not offset by the environmental benefits in my opinion.

I think that we will need to decide whether we support wind and solar energy or not. I think we won't support them any more. I think we should drop the certificates right away, and the output of these types of energy should be allowed to operate on a purely economic basis. If it works, fine, if it doesn't, that's it. But having an output ranging from 1200 MWh to 150 MWh from one day to the next is a big problem for the system.

In conclusion, the energy sector is the only one we could expect to see investments in. But that kind of investments takes a long time to implement, to make the decision.

I find it hard to believe that there are will be any significant resources in the sector of direct foreign investments, in 2013-2014.

Reporter: Do you think any other state-owned companies will file for insolvency this year?

Sebastian Vlădescu: I just said that the insolvency process will get worse and other state companies may file for insolvency as well.

Reporter: Do you think that the listings of energy companies on the BSE will be successful?

Sebastian Vlădescu: Do you think that we will ever be able to talk about the stock market as an institution which finances the Romanian economy instead of an institution that does financial speculation?

I keep hearing - stock market this, stock market that.

From what I learned in school, the stock market was invented as an instrument for companies to raise funding and I've been trying for years to find a company that raised funding through the stock market.

The BSE is not performing its main role, of raising funding, and brokers wait for someone to come and get them something to do.

Reporter: So you stand by your statement that a maker of sausages is more important than the stock market.

Sebastian Vlădescu: I repeat, to me someone who invests in making sausages is just as important as someone who speculates today shares in Transelectrica or Rompetrol.

Reporter: What is your opinion about the rising tax evasion? You were a finance minister ...

Sebastian Vlădescu: I fought it, didn't I?

Ordinance 54 was one of the best laws against tax evasion, at least three other markets were influenced by it.

In 2010, at least two markets which were being monitored saw tax evasion drop by half compared to January, when I became a minister.

On the cigarette market, tax evasion fell from 34%-35% to 18% and by the end of the year it got to 14%-15%.

On the oil market, the major tax evaders disappeared or some of them turned honest. This was one of the reasons why Petrom became much more profitable.

In the alcohol market, the sales of stamped alcohol have exceeded those of unstamped alcohol, due to the elimination of tax warehouses.

I think that ordinance 54 should be readapted, because I think that in the interim, tax evaders have adapted too.

But there is however in Romania an area of tax evasion which I've personally always felt that it can't be reduced - I am talking about the tax evasion generated by poverty.

I think that the biggest area of tax evasion is VAT. We collect a lot less VAT than the European average, because we sell a lot of goods in unregulated markets - village stores, fairs, on street corners.

The buyers from hypermarkets and supermarkets, generally pay VAT, but about 60% of Romania's population prefers buying products that don't carry VAT.

The main reason for this phenomenon is poverty, the fact that citizens' incomes are very low.

It is a tax evasion which is very hard to fight and in a way it is actually dangerous to do that...

Reporter: Especially as a politician.

Sebastian Vlădescu: Even as a man. I, who am a "heartless beast" who cut pensions and wages, have a problem with this area of tax evasion, when I think about the fact that people need bread or sunflower oil.

If we were to increase the number of members of the Economic Fraud Squad and we'd have them roam every market, shut everything down, arrest people, then we'd have a problem because people would no longer have where to buy products from.

This phenomenon can only be fought by increasing the revenues of the population.

Reporter: You yielded to Blejnar.

Sebastian Vlădescu: I never yielded to Sorin Blejnar. The fact that I failed to win the battle with him, by causing him to resign from the Ministry of Finance, doesn't mean that I yielded to him and the fact that ordinance 54 eventually came to exist was one of my great achievements.

Several things happened during my term at the Ministry of Finance, of the ones I wanted to do.

Reporter: So that means that you knew what Blejnar was doing over there...

Sebastian Vlădescu: I knew that we had a tax evasion problem, and that I needed to fight it, I didn't know what Blejnar was doing.

But a certain moment, I thought that I needed someone else if I wanted to fight tax evasion, so I asked for his dismissal and I didn't get it.

Reporter: Who did you ask for it?

Sebastian Vlădescu: To whoever was in charge of that. I had a boss ... there was a prime-minister.

Reporter: Emil Boc.

Sebastian Vlădescu: Yes, that would be it...

Reporter: But you fought Emil Boc as well.

Sebastian Vlădescu: Naturally, but I lost against him as well ...

With Emil Boc I lost a very important battle - the increase of the VAT.

Reporter: It would seem that it hasn't exactly been a good idea.

Sebastian Vlădescu: It's not just an impression, it was known that it would be a bad decision. But Emil Boc beat me and Traian Băsescu.

Reporter: The president is saying now that Emil Boc is the best president of the PDL.

Sebastian Vlădescu: The president has said that he is sentimental, so ...

Reporter: How do you feel about the new fiscal measures of the government?

Sebastian Vlădescu: The payment of VAT upon collection is dysfunctional, I know that the authorities want to change it.

I don't understand the system of the payment of VAT upon collection, I don't see its usefulness and I don't think it can be applied.

As for the lump sum tax, as far as I know it doesn't exist.

Reporter: It's being written now.

Sebastian Vlădescu: I wish them luck. When I was minister, I tried to write it and I failed, so from my point of view, whoever succeeds in writing in Romania a functional law of the lump sum tax fully deserves respect.

Reporter: What is your opinion on the creation of the Financial Oversight Authority?

Sebastian Vlădescu: If it goes all the way, it will be useful. From my point of view, the authority can only be functional if it brings together the oversight of banks, insurance, pensions and the capital market.

Because, if it doesn't include the banking oversight, next to that of the other markets, you will be forced find a way of mediating between the National Bank and the authority, which will depend on people, interests, expertise.

Reporter: Thank you!