The NBR has injected 2.5 billion lei into the market

2.5 billion lei (about 581 million Euros) was injected yesterday in the banking system by the National Bank of Romania (NBR), with a one-week maturity, at the monetary policy rate, of 6.25%/year. The liquidity injection was performed through a repo operation.

Through repo operations, the NBR provides liquidity to commercial banks and receives government bonds in exchange.

This operation comes almost two weeks after the Central Bank injected about 1.55 billion lei in the banking system (about 362 million Euro).

We are hoping that the news which traveled through press agencies, that the entire amount was injected into just one bank, is inaccurate, because otherwise it would violate the competition mechanism of the market.

Economics PhD Daniel Ionescu said that the latest auction held by the Ministry of Public Finance was a "complete failure, because after assessing the risk of default of the Ministry of Public Finance, the banks weren"t happy with the yield the Ministry was offering", and added:

"In order to stimulate the appetite of the Romanian banking system for participating in the auctions held by the Ministry of Public Finance - to finance public spending by increasing the domestic public debt - the NBR was forced to take over part of the government bonds previously acquired by the commercial banks, offering in exchange a 7-day repo agreement, worth 2.5 billion lei, which would be used by the banks to participate in the auctions to come".

Mr. Daniel Ionescu has explained that the reason for this type of "open market" operations that the Central Bank has performed is "the acute and increasingly chronic lack of budget resources which the government has been experiencing since the beginning of August (in August, < repo > operations performed by the NBR amounted to 3,629.8 million lei) and has been worsened by the fact that the status of the liquidity that the government has access to is narrowing from one day to the next due to the financial crisis that Romania has been pushed into".

Daniel Ionescu said:

"In fact, this is actually creation of money < out of thin air > which will be followed by what the Central Bank calls "sterilization" of the same value and by an inflationary outburst caused by the excess currency. It needs mentioning that this is the second repo contract performed on the current month".

Between August 17th - September 28th 2011, the Central Bank has purchased government bonds, through "repo" operations, from the commercial banks in the system, worth 8.180.6 million lei, which proves that the finances of the government are in a fault condition, he claims.

"In my opinion, the discernable < pattern > in these periodic open market operations performed by the NBR reveals the fact that the Central Bank is resurning its < repo > operations, just like it did in 2009 and to a lesser degree in 2010, in order to escape the deadlock caused by the lack of budget resources", Mr. Daniel Ionescu added.

He said: "In my opinion, the fact that the Central Bank comes to the aid of the Executive through legal operations in order to contain the peak of the government"s need for financing is beneficial and reflects a state of normalcy in the financial relationships between the country" main bank and the policies of the Executive. What raises questions, on the other hand, is the fact that, searching the website of the NBR, there is no mention whatsoever of any < reverse repo > operations (operations used to cancel out the creation of the money out of thin air)!"

This year"s largest operation was performed on August 16th, when the NBR injected 3.2 billion lei into the market, an amount which was attracted from five banks.