VZCZCXRO2206
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0812/01 2970929
ZNR UUUUU ZZH
P 230929Z OCT 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8795
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000812 
 
STATE FOR EUR/CE: ASCHIEBE 
ALSO FOR EUR/ERA: BROCKWELL, JKESSLER 
AND EEB/IFD 
TREASURY FOR: LKOHLER 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EIND RO
SUBJECT: ROMANIA: BY TAPPING ON THE BRAKES, THE CENTRAL BANK KEEPS 
THE FINANCIAL CRISIS UNDER CONTROL 
 
REF: A) BUCHAREST 789 B) OCT 21 KESSLER EMAIL 
 
Sensitive but Unclassified, Not for Internet Distribution. 
¶1.  (SBU) Summary.  Several factors particular to the Romanian 
economy have reduced the local impact of the global financial 
crisis.  Overall, Romania's financial and banking system has 
sufficient liquidity and is not expected to experience any negative 
short-term repercussions from the current crisis.  However, 
Romania's macro-economic picture is fragile, largely due to poor 
government budget discipline at a particularly sensitive time.  In 
all likelihood, Romania will experience a slow down in economic 
growth rates in the medium term.  Of continuing concern is a future 
depreciation of the Leu against the Euro, which would have negative 
implications for inflation and future credit growth, even as it 
positively affects the current account deficit.  According to the 
Romanian Central Bank (BNR) the current high rates on overnight 
inter-bank loans are chiefly a result of an unsuccessful speculative 
attack against the Leu.  End summary. 
 
¶2.  (SBU) The DCM and EconOffs met with Shamir Khaliq, the President 
of Citibank Romania, on October 17.  Khaliq mentioned that he had 
just returned from an emergency conference involving the President 
of Romania, the Central Bank, and the commercial banking community. 
He indicated that his perception, reinforced by the emergency 
meeting, is that sufficient liquidity exists in Romania to weather 
the global financial crisis.  Noting that he found the latest report 
issued by Goldman Sachs on Romania unfair, he laid out some of the 
differences present in the Romanian economy, which would mitigate 
the fallout from the crisis.  As opposed to Hungary, which was 
highlighted in the same report, Romania has very low debt to GDP 
ratios, low public debt to total debt ratios, high loan provisioning 
requirements for banks, and high minimum reserves requirements.  On 
the liquidity question, he pointed out that local banks are required 
to hold minimum reserves equivalent to 20 percent of their local 
currency balance sheet, and 40 percent for books denominated in 
foreign currencies.  This means that 9 billion Euros out of a 60 
billion Euro banking market are immediately available to the BNR if 
it ever has to inject emergency liquidity into the system.  These 
reserves are almost three times larger than the entire overnight 
interbank market.  Acknowledging the very high interest rates on the 
overnight market, he said that the small overall size of this market 
made it possible for the BNR to act as a counterparty, if it so 
chooses, to transactions if the market were to completely shut down. 
 
 
¶3.  (SBU) At the same time, foreign speculators tested the BNR's 
resolve and began making large bets against the Leu last week, 
expecting the BNR to abandon a defense of the currency.  However, 
the BNR cut off the attack by doing two things, temporarily selling 
Euros to prop up the Leu, and then declining to provide extra 
liquidity to the overnight market on October  17 as the speculators 
scrambled to settle their positions.  While this action temporarily 
raised interest rates on overnight loans to 80 percent, and while 
reverberations are still being felt in the commercial market this 
week, the BNR is unrepentant, with Governor Isarescu announcing to 
the press on the 20th: "Those who made mistakes in their betting 
have received a lesson.  Technically, all of their swaps couldn't be 
re-financed, because the Leu had been pulled out of the market.  It 
is not glorious for a large bank to be unable to close its 
position." 
 
¶4.  (SBU) The forex rate has remained volatile this week, with the 
Leu reversing its recent depreciation and recovering five percent of 
its value, perhaps as a result of the BNR's intervention.  This 
volatility presents concerns for individuals with large foreign 
currency loans.  In an October 10th meeting at the IMF, the regional 
representative for Romania and Bulgaria, Juan Ferndanez-Ansola, 
highlighted foreign currency lending as the major cause for concern 
in the local environment.  He pointed out that consumers earning 
local currency wages have borrowed 14 billion Euros from banks in 
Romania.  So far this risk has been mitigated by rapidly rising 
wages.  As the growth rate begins its expected decleration next 
year, the risk of defaults on these loans rises.  This, coupled with 
the recently implemented stricter provisioning requirements on new 
foreign currency lending, should decrease demand and encourage 
individuals to move to Leu-denominated fixed interest loans. 
Unfortunately, the high overnight market rates are having the 
opposite short-term effect, with interest rates on some variable 
loans shooting up to 18 percent this week. 
 
¶5.  (SBU) Despite believing that the credit market will shrink in 
the next year, the IMF is currently forecasting a 4.8% GDP growth 
rate for Romania in 2009.  While the local IMF has traditionally 
held a bearish attitude about the Romanian economy, Fernandez-Ansola 
 
BUCHAREST 00000812  002 OF 002 
 
 
believes that the global financial crisis will only slow down 
investment and marginally increase unemployment, but not stop growth 
completely (Comment: Given the current upward pressure on wages, an 
uptick in unemployment would be welcomed in some quarters.  End 
Comment.)  A bigger concern for the IMF is the GOR's lack of fiscal 
discipline in an election year.  Highlighting the 50 percent raise 
recently approved for teachers (ref A), Fernandez-Ansola remarked 
that the GOR will need a net six billion Euros to meet obligations 
before the end of this year, an amount which, especially given the 
current situation, is impossible to finance on the international 
market.  The MEF is instead locked into the domestic market, and 
correspondingly high interest rates, simply to meet existing 
obligations, which will make future spending still more difficult. 
 
¶4.  (SBU) Another cushion for the Romanian market is that local 
mortgage loans are typically extended for no more than 40 to 70 
percent of the value of the property, most of which are 
owner-occupied.  The high individual equity, and relative novelty of 
mortgage lending, means that foreclosures are still a rarity in 
Romania, as the owners carrying loans are able to sell their 
substantial equity stake in their homes and pay off the mortgage in 
cases of financial distress.   It is true that many of these 
mortgages are denominated in Euros, which carry lower interest 
rates, but bear a substantial exchange rate risk.  A rapidly 
depreciating Leu can be a double whammy for households, raising the 
cost of the loan, while at the same time inflating the prices for 
basic imported goods.  One negative aspect of EU accession for 
Romanian households is that imported food and higher quality 
consumer goods have driven many local producers out of business. 
Accordingly an exchange rate swing in Romania would have an 
immediate and disproportionate impact on household consumption. 
 
¶6.  (SBU) Comment. Perversely, a reduction in the availability of 
credit and a cooling of the global economy is precisely what Romania 
needs in order to put itself on a more stable long-term growth 
track.  Instead of having a negative impact, slowing credit growth 
is precisely the tap on the brakes that is needed to keep the 
Romanian economy on its current growth trajectory.  Credit 
penetration is still low compared to the more developed EU 
economies, with the average Romanian having little exposure to 
financial markets and consumer debt.  Some individuals and firms, 
especially those overextended in foreign currencies, will be 
impacted and certain sectors will slow.  However, economic growth in 
Romania is broadly based and reflects, more than anything else, a 
belated catch-up with the rest of the EU.  The long-term problems of 
insufficient investment in infrastructure, education, and 
healthcare, are very different from a short-term financial panic in 
global markets.  Rather, the crisis has hit precisely at the time 
that Romania has been feeling the negative inflationary effects of 
an expected eight percent annual GDP growth rate, a rate which the 
GOR has been understandably unwilling to reduce in an election year. 
 A forced reduction in the availability of credit will limit the 
impact of the Romanian Parliament's increasingly irresponsible 
attitude towards fiscal discipline, as well as Parliament's scope 
for future "presents" to the Romanian voter.  End comment. 
 
Taubman