THE URGENCY OF THE ANTI-CRISIS PROGRAM There are solutions, but the dangers are great

Reporter: More to the point?

Mihai Bogza: It would take me too long to formulate a complete set of solutions, and I could not do it for the whole economy, so I"ll just give a few examples. Thus, we, the banks would have to be able to identify a number of sectors that we could be certain would remain viable. And then, at least the credit risk factor could be cut from the cost of the loan.

What would these sectors be? They could include sectors we know are going to be in high demand, which are unaffected by the foreign situation. Romania is notoriously deficient in the infrastructure department -everyone knows that we"re among the countries with the lowest number of kilometers of highway. Another criteria would be focusing on sectors where the domestic financing sources could be supplemented with European funds. In the case of a project which is partly financed with non-reimbursable funds, the credit risk is reduced.

Today however, criteria like the ones I mentioned can not be applied mechanically. Let"s take the pharmaceutical sector. It could seem relatively safe because domestic demand is relatively inelastic and as such it would not be affected by the international crisis. In fact, because of the way that authorities set the final price through an over appreciated exchange rate, the sector is extremely insecure from a bank financing point of view, and, as such, the credit risk is extremely high. And this is just one example...

Or, as long as viable economic sectors are driven into trouble by administrative measures, how are we going to know which one to fund? That is why I say that banks need clear signals from the authorities concerning the future chances of various economic sectors. If 4-5 big sectors get revitalized, this could act as a stimulant for the rest of the economy.

Likewise, in the absence of a clearly defined economic program, we don"t know, for instance, which public sectors could see serious staff or wage cuts, and thus we are pretty cautious in lending money to employees from this sector. Of course, right now, it"s better to fund supply than demand, because of the risk that, in spite of the evolution of the exchange rate, this demand will increase the current account deficit. But excessively restricting lending of physical persons is also harmful in the long run, because it hinders supply.

As for the liquidity risk, the main priority is securing long term resources for funding, especially in lei, but also in foreign currencies.

Reporter: And how could this problem be solved?

Mihai Bogza: An immediate solution would be to return the liquidities held by banks as minimum mandatory reserves in the banking circuit. It will not be easy, because this would conflict with the goals of the National Bank"s monetary policy, both when it comes keeping the stability of the exchange rate, as well as reaching the inflation target. On the other hand, as the Ministry of Finance is more and more present in the market as borrower, I think we can find mechanisms which one way or another would ensure the transfer of the banks" liquidity from the area of the minimum mandatory reserve held by the NBR into state bonds. Once again, it is not easy, but we, the banks, need to know as soon as possible what liquidity resources we can count on and when.

Also, from a liquidity stand-point, it is important that investors quickly get signals that Romania"s economy is stabilizing. This way, the Romanian state"s and banks" access to funding would be easier, more certain and also cheaper - since we are talking about cost of credit risk.

Reporter: But a credible economic program has to have funding too...

Mihai Bogza: A foreign aid from the IMF or the EU would be welcome at a time like this. But I don"t want to give advice to the Romanian authorities. Me, I think it"s obvious that regardless of how we act, we can"t adjust a 14% deficit in one year. It would be a disaster and the economy would collapse badly.

It is obvious that, among other things, such an anti-crisis program must set the pace for the reduction of the current account deficit and the way the deficit will be financed for this year. Like I said, last year we had 15-16 billion Euros foreign funding. Even if we make it a goal to cut the current account deficit to, let"s say, half, meaning 7%, we"d still have to find foreign funding worth 7-8 billion Euros, to which would be added a part of the local banking funding deficit.

That"s what banks would need to know, so we could make sure that the situation is getting better, and as a result, we could resume lending. Such programs currently exist in all the developed countries in the European Union. They don"t exist in Romania yet. And even in the countries where these programs are running, lending has not reached its pre-crisis rate. It is clear that banks need a little more time before they can internalize their new economic climate.

And I"ll say it again, banks are among the first who are interested in returning to an activity that has at least a semblance of normalcy. Because in the long run, us banks can"t afford to stay passive - just collect old loans without giving any new loans. Just like in any company, operating in "emergency mode" isn"t sustainable on the long run.

Reporter: How long can a bank operate like this?

Mihai Bogza: Depends, from one bank to another. Depends on their liquidity, their capital, shareholder support, etc. But it is certain that a limited activity is preferable over operating full scale, as long as uncertainty remains. You can"t throw the shareholders" and depositors" money into an uncertain economy - and please note, that banks have long been criticized for being aggressive.

Reporter: Until now banks were fighting for market share.

Mihai Bogza: It seems like such a long time ago... And it"s only been a few months.

Reporter: What will the banking system be like in 2009?

Mihai Bogza: Like I was saying, I believe there will be a lot of caution when it comes to lending until we can see the first signs of recovery in the economy.

Reporter: Will we see banks closing their branches?

Mihai Bogza: It"s possible, because most of them were opened in times when rents were at a very high level. Given the current conditions for the reduction in activity, I don"t know if banks will be able to afford to pay such rents any more. There are places where the rent is over 100 Euros/square meter in the center of Bucharest. If the landlords don"t agree to renegotiate their leases, some branches could be closed or relocated.

Reporter: Will there be layoffs in the banking sector?

Mihai Bogza: Why not? If that pessimistic scenarios becomes reality...

Reporter: How will you attract deposits this year?

Mihai Bogza: Let"s get the context clear. In November, the Romanian banking sector had 52 billion Euros in loans and 42 billion in deposits meaning there was a 12 billion deficit, which was covered in part by the mother-banks. But in reality, this deficit was much greater, because we also had the mandatory minimum reserves, which means an additional 12-14 billion. So we were relying very much on resources from the mother banks. These resources will not be withdrawn in 2009, but it"s clear that for new loans we will only be able to rely on what deposits we will be able to draw. Right now, "Bancpost" has a privileged position in the banking system - our deposits are greater than our loans. The problem is that we use deposits to fund the minimum mandatory reserve which is pretty big, the equivalent of a few hundred million euros. So attracting new deposits represents a priority for us and will remains so as long as the minimum mandatory reserve stands. Moreover, in an economy which is in crisis you need a liquidity surplus which can provide the certainty that in case an unexpected event occurs, you can handle it.

Reporter: What other priorities do you have for this year?

Mihai Bogza: Our main priority is to maintain the quality of our assets. In times of crisis it is obvious that no matter what the banks and the authorities do, the quality of the loan portfolio deteriorates. And then a new strategy for handling this phenomenon becomes needed.

In this context we have agreed to reduce lending, until we understand better what"s happening in the economy. What"s even more important is the management of the existing portfolio.

Reporter: Most likely there will be defaults on loans. Are banks ready for this?

Mihai Bogza: At Bancpost, we are carefully watching this type of situations. At the end of last year we have announced a set of measures, which are still in effect, by which we tried to aid some customers who are experiencing temporary difficulties in making their payments. When we see our customers are acting in good faith, we take steps to help them. If wee see ill-faith, we react accordingly because we have a responsibility for the depositors" money and to the shareholders.

Reporter: To what extent the recent depreciation of the leu will affect the borrowers" ability to reimburse loans taken in foreign currency?

Mihai Bogza: We hope that this abrupt depreciation of the leu will not continue in the future. I mean, there might be a depreciation, but it will continue at a slower rate.

What happened last year was, after all, a correction, meaning we had a depreciation of some 10% of the leu against the Euro as we had an inflation rate of 6-7%. The Euro has appreciated a little more than the level of inflation.

What happened in the beginning of this year is however a pretty dangerous evolution because the leu has lost in 10 days almost as much as it did last year. We all hope that this trend will not continue, because if it does, some clients will definitely have trouble in paying back their loans.

Reporter: In the end, are you optimistic or pessimistic when it comes to the evolution of the economy this year?

Mihai Bogza: I think that, if the authorities get involved quickly and efficiently, this year that has begun rather unfavorably could eventually end well.

Reporter: Thank you!