X-Trade Brokers: Romania - An Economic Horror Movie

"To analysts and financiers, Romania"s current economic situation looks like the script of an economic horror movie... if such genre existed," according to Victor Safta, the Managing Director of the Romanian subsidiary of X-Trade Brokers. According to him, "the political crisis Romania has been having for several weeks has worsened the already precarious economic situation at the worst possible time. If the third tranche of the IMF loan is delayed or cancelled, both the Romanian economy and currency will simply explode and, unfortunately, it will be on the long term."

Without a stable Government and a budget for next year, Romania is very close to losing the next tranche of the loan contracted with the IMF. "Even if the political situation is clarified, a new Government will have to create a budget with a deficit of only 5.9 per cent, which we do not think possible, considering the expenses projected for next year," X-Trade Brokers analysts believe.

In their opinion, if the IMF funds are not disbursed, the Romanian Government will have to borrow from commercial banks in order to cover pressing expenses. Such loan would greatly diminish the amount of money available on the market and thereby inflate the interest rates on any kind of loan.

"Moreover, the rating agencies have been fairly patient with Romania so far, but a delay in the disbursement of the next tranche from the IMF is very likely to trigger a downgrade of the country rating and, as a chain effect, cause other negative effects, such as an increase in the cost of all foreign loans, a decrease in the already low volume of foreign investments etc.," the X-Trade Brokers report indicates.

"If capital becomes even more expensive, it will be the coup de grace to the national economy, which is anyway deeply sunk into the crisis," Victor Safta added. Surges in the inflation rate and a massive devaluation of the RON would become quite realistic in such scenario, according to the X-Trade Brokers analysts. Technical analyses performed by X-Trade Brokers indicate that the RON/EUR exchange rate remains on an upward trend and is drawing closer to the historical peak of 4.3345 RON/EUR.

"At this point, it is possible to test the upward trend line at 4.2600 - 4.2700, followed by the point of resistance at 4.3345. If such point is exceeded, we will not have any resistance based on previous peaks, so the only guidelines will be the psychological milestones of 4.5000 and 5.0000," X-Trade Brokers noted.

"Higher interest rates and the devaluation of the RON would have extremely serious consequences, which could sink Romania into an economic crisis for at least one or two years. Romania is dependant upon imports in every single sector, and imports are paid for in euro. To increase salaries next year is not exactly a realistic idea, so the consumers will have the same amounts of lei as this year, whereas the rising RON-denominated prices will further discourage consumption and that will be the end of even more companies and the loss of even more jobs, so people will have even less money for consumption... and so on," Victor Safta explained.

"It may seem bizarre that several decision-makers do not see that Romania is practically on the brink of political and economic chaos, which usually leads to social chaos. We have the example of Argentina, which experienced public turbulence and financial default in 2001, after a long recession and the accumulation of tremendous public debt. The cancellation of an IMF tranche contributed to the devaluation of the Argentinean peso by roughly 50 per cent in only a few months," Safta concluded.