Financial Lifeline
March 26, 2009
"We have successfully concluded negotiations on a multilateral support package including the IMF, the EU, the World Bank and other international organizations," said Jeffrey Franks, head of the IMF mission, at the end of negotiations Wednesday.
The IMF will make 12.95 billion euros available in a two-year standby credit, Franks said.
The IMF acknowledged the bleak economic prospects for Romania, already one of the EU's poorest countries in per capita terms, but said aid would limit the impact of the global financial crisis.
"In (the) current world economic environment ... the financing gap has opened up," Franks told reporters. "With international support, the adjustment will be cushioned and we are hoping to avoid the worst and have a gradual adjustment over time."
The European Commission is to raise an additional 5 billion euros from the international financial markets and hand them over in installments to Romania at favorable terms.
Additionally, the World Bank and the European Bank for Reconstruction and Development, along with other institutes, will each contribute 1 billion euros to assist Romania.
To access the money, Franks said Romania will have to ensure that its budget deficit for 2009 does not exceed 5.1 per cent of gross domestic product. That figure reached 5.3 per cent in 2008, and the European Commission now wants it to be reduced to below 3 per cent in 2011.
By taking the aid, Romania's government would also commit itself to freezing wages in the public sector and reforming public pensions. Franks said public sector wages doubled over the last three years.
Additionally, Romania's central bank would be obliged to hold inflation below 4.5 percent.
Franks added that Romania's banking system remains unstable. Nonetheless, he said IMF officials would meet Thursday in Vienna with the 10 banks that do the most business in Romania in an effort to convince them not to withdraw funding from their operations in the country.
EU welcomes deal to ease Romania's struggles
EU officials in Brussels welcomed the deal, with European Economic and Monetary Affairs Commissioner Joaquin Almunia saying the aid package would help Romania emerge "stronger" from the crisis.
"I am aware of the hardships that Romania and its citizens are encountering at this time of crisis, but I am confident that with the right policies and with the help of the EU and other international bodies, they will emerge stronger," Almunia said in a statement.
The European Commission is also providing soft loans totaling 9.6 billion euros to Latvia and Hungary.
Of the 6.5 billion euros being lent to Hungary, 2 billion were recently raised on the money markets and handed over to Budapest at an annual interest rate of 3.25 per cent, officials in Brussels said.
At a summit in Brussels last week, EU leaders agreed to double the commission's balance-of-payments facilities to 50 billion euros amid concerns that other non-euro zone member states may be about to fall victim of the global credit crunch.
The IMF has forecast that the Romanian economy faces a contraction of 4 to 6 percent in 2009, after posting 7.1 per cent growth in 2008.
Romanian Prime Minister Emil Boc is expected to sign the agreement in two weeks. The first 5-billion-euro funding injection could be headed to Romania by early May.
EBRD chief calls for troubled nations to ask for help
The head of the European Bank for Reconstruction and Development (EBRD), Thomas Mirow, meanwhile told the Financial Times Deutschland newspaper Wednesday that troubled eastern European economies should seek help now rather than feed speculation about their problems.
"Countries that think they need International Monetary Fund help should turn quickly to the IMF," he said.
"It would be terrible for market sentiment if throughout 2009, like in a serial novel, we have to constantly ask ourselves which is the next country on the list" of those needing bailouts, he added.
In the current crisis, Romania is the fifth central and eastern European country after Hungary, Latvia, Serbia and Ukraine to turn to the IMF for help.
Franks said the IMF mission to Romania would now to go to Vienna to meet the main foreign banks active in the region "to negotiate their support."
In a statement, IMF Managing Director Dominique Strauss-Kahn said the deal was subject to approval by the fund's executive board, which would meet "in the coming weeks" to discuss the stand-by arrangement.