VZCZCXRO3048
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHBM #0723/01 3020527
ZNY CCCCC ZZH
P 290527Z OCT 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 0008
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 BUCHAREST 000723 
 
SIPDIS 
 
STATE FOR EUR/CE ASCHEIBE AND EEB/IFD/OMA 
TREASURY FOR LKOHLER AND JBAKER 
 
E.O. 12958: DECL: 10/28/2019 
TAGS: ECON EFIN PGOV IMF EUN RO
SUBJECT: ROMANIA WON'T MEET 2009 IMF OBLIGATIONS, BASESCU 
SAYS 
 
REF: BUCHAREST 563 AND PREVIOUS 
 
Classified By: DCM Jeri Guthrie-Corn for Reasons 1.4 (B) and (D). 
 
¶1.  (SBU) With a joint assessment team from the International 
Monetary Fund (IMF), European Commission (EC), and World Bank 
(WB) having arrived in Bucharest this week to review 
Romania's compliance, President Traian Basescu declared to 
reporters that Romania will not meet all its obligations to 
the IMF by the end of 2009 and the existing agreement 
(reftels) will have to be amended for 2010.  Basescu made the 
statement during a campaign stop in which he blamed the 
opposition PSD and PNL parties for bringing down the PDL-led 
government of Prime Minister Emil Boc and thus complicating 
Romania's ability to meet its commitments.  Basescu 
acknowledged what economic observers have been speculating 
ever since the Boc Government fell earlier this month, namely 
that the current political stalemate in advance of 
presidential elections makes it virtually impossible for 
Romania to pass key legislation required under its Letter of 
Intent with the IMF before December 31. 
 
¶2.  (C) In an October 15 meeting, IMF Resident Representative 
Tonny Lybek told the Ambassador that the assessment visit 
would have to be postponed until a new Cabinet was in place 
and approved by Parliament, virtually assuring that the next 
IMF disbursement would be pushed into early 2010.  However, 
the Government of Romania (GOR) mounted a full-court press 
for the visit to go forward, fearing that a postponement 
would only feed political instability and further damage 
Romania's already shaky image in international markets.  The 
GOR is believed to have met the agreement's technical 
criteria through the end of the third quarter (i.e., ending 
September 30), with the budget deficit through the first nine 
months of 2009 estimated at 5.1 percent of GDP, below the 5.4 
percent target for the period.  The current account deficit 
and inflation have also fallen even faster than initially 
predicted.  However, the crucial judgment call for the IMF 
team will be whether Romania's inability to legislate major 
structural reforms by year's end will affect disbursement of 
the next IMF funding tranche in December. 
¶3.  (C) Pressing for the assessment to take place as planned 
is a high-stakes gamble for the GOR, given that Boc's 
caretaker government can make no binding commitments and is 
certain to be replaced in the coming weeks.  Still, the GOR 
appears intent on preserving every possible chance of 
receiving the next IMF disbursement before the end of 2009. 
Much more than Romania's image is at stake.  Even though 
Romania has so far stayed within the GDP deficit targets 
agreed with the IMF, the deficit traditionally balloons 
sharply in the 4th quarter, and the GOR is counting on the 
IMF money (some 1.5 billion euros) to cover salaries, 
pensions, and other vital expenditures through the end of the 
year.  The economy still shows few signs of recovery, holding 
out little hope for any short-term improvement in tax 
revenues.  At the same time, the Ministry of Finance is 
struggling to sell enough debt in the domestic market to 
finance the deficit.  The Ministry this week rejected all 
bids at a tender to sell one-year treasury bills, indicating 
that the yields being demanded by domestic banks were too 
high; at a previous tender on October 19 the accepted yield 
was set at ten percent.  The Ministry has similarly rejected 
bids or trimmed sales amounts several times in the last 
couple of months, and has indefinitely postponed a Eurobond 
issue targeted for October due to the continuing political 
uncertainty.  All this suggests that, absent the IMF 
infusion, the GOR may face a severe funding crunch by 
December. 
¶4.  (C) At the October 15 meeting, IMF Representative Lybek 
outlined the essential legislative approvals the IMF is still 
seeking from Romania in 2009:  a 2010 budget law which 
demonstrates realistic revenue projections and convincing 
measures to contain spending excesses; a pension reform bill; 
and a "fiscal responsibility act" which restructures the way 
the GOR conducts its annual budgeting and forecasting 
exercises.  Lybek noted that the Boc Government had succeeded 
in getting the fourth major piece of legislation, the unitary 
salary law, through Parliament in September, though it was 
the battle over this law which precipitated PSD party 
withdrawal from the coalition government.  The law has 
subsequently been challenged in Romania's Constitutional 
Court, which was set to rule on the case this week but 
announced it would postpone its decision until December 9, 
after the presidential election.  Lybek insisted that, no 
matter the political environment, the 2010 budget must have 
 
BUCHAREST 00000723  002 OF 002 
 
 
parliamentary approval to demonstrate that Romania's 
political establishment is committed to respecting the IMF 
agreement through 2010.  This theme was echoed to the 
Ambassador on October 26 by National Bank of Romania (BNR) 
Governor Mugur Isarescu, who said all parties have declared 
rhetorical support for the agreement but must now 
demonstrate, during the presidential campaign and its 
aftermath, that their commitment is real.  Isarescu wasn't 
optimistic, characterizing as "highly improbable" the chance 
that Parliament will pass a budget to the IMF's liking by 
December 31. 
¶5.  (C) Comment:  The IMF has shown Romania leniency already 
this year in response to the severity of the recession, 
modifying the accord to nearly double the allowed budget 
deficit and agreeing to let IMF money be used for direct GOR 
spending.  Romania's lame duck government is now pleading for 
clemency once again, arguing it deserves the next tranche of 
money purely on the basis of technical targets met through 
September even while acknowledging that it cannot deliver the 
major legislative reforms promised in 2009.  Nor can the GOR 
assure the IMF on when real action will follow, since the 
makeup of the next government could remain unresolved for 
weeks yet.  The IMF's prior flexibility stemmed, in part, 
from recognition that the deep recession was driven by many 
factors beyond the GOR's direct control.  This time, however, 
the impasse on structural reforms is all about domestic 
politics.  The IMF will have to weigh carefully the downsides 
to Romania if it withholds the money, versus the potential 
downsides to the IMF's own credibility if it gives Romania 
another pass.  End comment. 
GITENSTEIN