VZCZCXRO5774
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBM #0424/01 1731328
ZNR UUUUU ZZH
P 221328Z JUN 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9645
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000424 
 
SENSITIVE 
 
STATE FOR EUR/CE ASCHIEBE AND EEB/IFD 
TREASURY FOR JBAKER AND LKOHLER 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EIND RO
SUBJECT: ROMANIA AND IMF: COMMERCIAL BANK LENDING STILL WEAK DESPITE 
FIVE BILLION DEPOSIT 
 
Sensitive but Unclassified; Not for Internet Distribution. 
 
¶1.  (SBU) Summary.  Commercial loans remain scarce, despite the 
Romanian Central Bank's (BNR) cut in reserve requirements following 
receipt of the first tranche of five billion euro from the IMF in 
May.  High interest rates on bonds issued by the Government of 
Romania (GOR) are vacuuming up some of the liquidity in the system, 
with banks demonstrating a marked preference for 11 percent interest 
on three- to six-month T-bills rather than accepting the longer 
maturities, higher risk, and lower yields on offer in the commercial 
lending market.  The Romanian banking system as a whole remains 
stable; however, the next six months will be hard on some banks 
thanks to higher default rates on consumer accounts.  While the 
biggest players in the Romanian market should be able to ride out 
the storm, little new credit is available to any but the most 
well-established firms.  End summary. 
 
¶2.  (SBU) In a series of interviews, EconOff "took the pulse" of the 
largest banks on the Romanian market, starting with French-owned 
BRD-Societe Generale, the second largest bank.  Vice-President 
Claudiu Cercel explained the sharp 6.2 percent contraction in first 
quarter GDP was driven by a frozen credit market and that the 
accompanying reduction in economic activity had increased the risk 
on banks' balance sheets.  Underlining BRD's relatively strong 
position, Cercel said that at present there is plenty of liquidity 
in the market, but "prudential" underwriting and the lack of good 
project proposals have kept loan volumes low.  For the most part, 
both clients and banks have adopted a "wait and see" attitude, 
expecting continued economic uncertainty through at least the third 
quarter of 2009.  While long-term banking prospects remain good, 
Cercel highlighted the precarious situation of some Greek and 
Austrian banks, particularly Alpha Bank, which expanded too 
aggressively during the boom.  As non-performing loan portfolios 
rise, many banks in Romania have shifted 180 degrees to loss 
mitigation mode, limiting the supply of new loans.  While nobody is 
likely to withdraw from the market entirely, BRD believes the 
fragmented market is in need of consolidation.  With most of their 
banking rivals bleeding more severely, the BRD's only significant 
competition comes from the European Bank for Reconstruction and 
Development (EBRD) and the European Investment Bank (EIB). 
 
¶3.  (SBU) The largest bank in Romania, Austrian-controlled 
BCR-Erste, has a similar position to their French rivals.  Peter 
Bombeld, BCR's former Director for Corporate Finance and Investment 
Banking, painted a relatively bleak picture of the health of 
corporate Romania.  (Note:  Bombeld had resigned from the bank the 
day before meeting with EconOff to start his own consulting firm.) 
In Bombeld's opinion, local companies accustomed to easy money are 
reluctant to take the painful steps required in the current 
circumstances.  This makes banks reluctant to lend money, because 
underwriters want to see a credible plan for remaining healthy 
through the recession.  Agreeing with BCR, Bombeld said that there 
is enough liquidity on the market, but that there is a shortage of 
solid, bankable projects.  He also noted that losses on loan 
portfolios are rising.  According to Bombeld, real estate has been 
particularly hard-hit, with some banks, such as Raiffeisen and 
Alpha, experiencing big increases in non-performing loans.  Bombeld 
was guardedly optimistic that the agriculture, food processing, and 
healthcare sectors may see some growth this year. 
 
¶4.  (SBU) To contrast the views of the bankers with those of the 
non-financial sector, EconOff met with Ernst and Young Partner 
Venkatesh Srinivasan, who bluntly said that corporate lending has 
halted.  Srinivasan has clients with bankable projects, but the 
banks are risk-averse to the point of paralysis.  While real estate, 
retail, and construction are particularly hard hit, Srinivasan said 
funding was scarce for projects in most sectors.  Agreeing that 
long-standing clients of BRD-Societe Generale, BCR-Erste, and CEC 
Bank are able to obtain smaller short-term loans, he indicated that 
larger credit facilities are unavailable, even to creditworthy 
borrowers.  Srinivasan echoed the message that Raiffeisen and Alpha 
Bank have essentially exited the corporate lending market, and he 
added ING to the list of banks with little money to lend.  By far 
the most pessimistic of our interlocutors, Srinivasan said he 
believes that the worst is yet to come, especially in the 
manufacturing sector. 
 
¶5.  (SBU) The BNR's Director of Bank Supervision, Nicolae Cinteza, 
was more pessimistic than usual on the stability of some local 
banks.  Echoing the message that overall stability is good and 
liquidity is available, Cinteza said that high interest rates and 
losses caused by the economic contraction are increasing bank 
losses.  Provisioning against these losses destroyed bank profits in 
the first quarter.  To bolster stability, the BNR has raised 
solvency requirements from eight to ten percent, a number which 
 
BUCHAREST 00000424  002 OF 002 
 
 
three of the larger banks on the Romanian market are struggling to 
meet.  There is a real concern that the numbers could get worse. 
Provisioning currently covers 123 percent of the 2.6 billion USD 
portfolio of overdue loans, but credit quality is worsening, with 
the weight of "impaired" loans (overdue by less than 90 days) rising 
to 9.4 percent in March 2009 from 4.4 percent in March 2008.  Even 
so, Cinteza noted that April was a good month, with most banks 
posting profits.  BNR concludes that it is too early to feel the 
impact of the five billion euro recently received from the IMF. 
Despite the release of approximately one billion euro on the local 
market through a reduction in reserve requirements, credit 
availability has not significantly improved.  In fact, outstanding 
short-term foreign currency debt has dropped by 20 billion euro 
since November 2008, while the size of credit lines extended to 
local subsidiaries by foreign parent banks have shrunk over the same 
period. 
 
¶6.  (SBU) In a recent BNR poll, commercial banks said that Romania's 
riskiest sectors for lending are real estate, construction, 
transportation, communications, and tourism.  Accordingly, for the 
fourth quarter in a row, 89 percent of the banks have raised 
collateral requirements, increased down-payments, and added 
additional risk-associated fees.  Banks acknowledge that new loan 
applications are dropping to unprecedented low levels.  What the 
bankers don't say is that their high interest rates and fees are 
helping to deter most would-be applicants, with average local 
currency loan rates (including fees) at a usurious level of 22.5 
percent.  With the banks able to lend to the Government at an 
average of 11.07 percent, there is little pressure to open up the 
taps to the riskier corporate sector. 
 
¶7.  (U) A statistical snapshot of bank health shows that interbank 
lending rates have come down significantly from their October 2008 
peak of 22.98 percent, though they still remain high at 10.98 
percent.  Commercial rates offered by banks on existing 
leu-denominated deposits climbed from an average of 12.23 percent in 
October 2008 to 15.57 percent in March 2009 as banks jockey to 
buttress their balance sheets.  Banks have been offering a premium 
on new deposits, paying an average of 16.2 percent in March 2009 
(versus 14.15 percent in October 2008).  While total non-government 
credit balances have risen by 18.9 percent from April 2008 to April 
2009, the recent trend is negative, with a one percent drop between 
March and April.  The leu non-government credit balance was up 7.8 
percent between end-April 2008 and end-April 2009.  The leu trend is 
reflected in foreign currency loans, albeit at much lower interest 
rates. 
 
¶8.  (SBU) Comment.  Current lending is comprised almost exclusively 
of credit roll-overs for existing clients, despite the release of 
one billion euro onto the market in May thanks to the reduction in 
foreign currency reserve requirements after the IMF disbursement. 
Post's early analysis is that the "gentlemen's agreement" the IMF 
obtained from the banks to keep capital in Romania has barely been 
honored.  Most of the banks appear to have continued to reduce 
foreign currency exposure to the Romanian market, rather than using 
the released reserves to resume lending.  While all the banks claim 
loans are available, the fact is that a Romanian business applying 
for a loan today would find the process of actually obtaining credit 
interminable.  As Ernst and Young's Srinivasan put it, "The banks 
will never say no, they'll just ask for more paperwork."  For good 
or ill the EBRD and the EIB have stepped into the breach, building 
market share while the commercial banks tread water.  While the GOR, 
including President Basescu himself, has recently taken the banks to 
task for failing to restart lending, the sad truth is that it is the 
Government's own financing needs which are equally responsible for 
crowding out the corporate sector.  Lending at 11 percent in 
three-month installments to a government which has never defaulted 
is a much safer business decision than lending to a corporate client 
in a recession, no matter how impaired the Government's official 
credit rating.  End Comment. 
 
GUTHRIE-CORN