Identifier
Created
Classification
Origin
09BUCHAREST115
2009-02-20 14:59:00
CONFIDENTIAL
Embassy Bucharest
Cable title:  

ROMANIA: ECONOMIC OFFICIALS PRIVATELY AGREE IMF

Tags:  ECON EFIN PGOV PREL IMF RO 
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DE RUEHBM #0115/01 0511459
ZNY CCCCC ZZH
P 201459Z FEB 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9247
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 BUCHAREST 000115 

SIPDIS

STATE FOR EEB AND EUR/CE ASCHIEBE
TREASURY FOR LKOHLER

E.O. 12958: DECL: 02/19/2019
TAGS: ECON EFIN PGOV PREL IMF RO
SUBJECT: ROMANIA: ECONOMIC OFFICIALS PRIVATELY AGREE IMF
PROGRAM ADVISABLE

REF: 08 BUCHAREST 1016

Classified By: Charge d'affaire Jeri Guthrie-Corn for reasons 1.4 (b) a
nd (d).

C O N F I D E N T I A L SECTION 01 OF 03 BUCHAREST 000115

SIPDIS

STATE FOR EEB AND EUR/CE ASCHIEBE
TREASURY FOR LKOHLER

E.O. 12958: DECL: 02/19/2019
TAGS: ECON EFIN PGOV PREL IMF RO
SUBJECT: ROMANIA: ECONOMIC OFFICIALS PRIVATELY AGREE IMF
PROGRAM ADVISABLE

REF: 08 BUCHAREST 1016

Classified By: Charge d'affaire Jeri Guthrie-Corn for reasons 1.4 (b) a
nd (d).


1. (C) Summary. Both the new State Secretary for budget
issues at the Ministry of Finance (MOF),Gheorghe Gherghina,
and the Prime Minister's new Economic Advisor, Ionut Popescu,
told EconCoun this week that they believe a standby agreement
with the IMF is advisable sooner rather than later, given the
gloomy outlook for the Romanian economy. However, such an
accord has little public or political support at present,
making forward progress difficult. Neither Gherghina nor
Popsecu expected significant modifications to the
government's 2009 budget proposal, which is being debated
this week in Parliament. Responding to Embassy concerns over
effects of the budget squeeze on U.S. companies, Gherghina
said the Government of Romania (GOR) is making a concerted
effort to resolve long-delayed payments to U.S. contractors
and hopes to substantially clear the backlog in VAT
reimbursements by the end of next month. However, both
Gherghina and Popsecu said that PM Emil Boc had caved in to
strong pressure from trade unions on social security
financing by freezing GOR contributions to private pension
plans, and that despite complaints from post and prominent EU
embassies, as well as from AIG and the other companies in the
pension market, the freeze was unlikely to be overturned this
year. Popescu admitted that the baseline economic
assumptions on which the GOR based its 2009 budget are
unrealistically upbeat compared to those of most private
sector analysts, and that the bleak economic outlook would
likely force the GOR to revise the budget downward within 2-3
months. End Summary.


2. (C) Both Gherghina and Popescu agreed on the advisability
-- and eventual necessity -- of an external financing
agreement, very likely to include a standby agreement with
the IMF. However, both made a point of saying that this was
a personal opinion and that the Government was not yet

decided on this matter. According to Gherghina, MOF believes
that banks, although not necessarily the GOR, would start to
experience problems rolling over Lei-denominated debt in the
next 4-5 months, making a precautionary arrangement with the
IMF advisable, even if for no other reason than to restore
confidence in the market. Reflecting on his term as a former
Finance Minister, Popsecu noted that he thought that it had
been a mistake for the GOR to give up its previous agreement
with IMF, but that one is needed now to help calm the market
and reassure investors. Popescu also admitted that with both
political leadership and public opinion opposed, it is an
uphill battle convincing others in the GOR to open
negotiations with the IMF. This is a danger in that Romania
could be forced into an agreement when the situation becomes
truly dire rather than proactively seeking help now, he
noted.


3. (C) On the recently submitted budget, Gherghina expected
no significant modifications by Parliament, though he did say
that there was pressure to expand funds dedicated to health
insurance and research. Likewise, Popescu agreed that the
budget would largely pass unmodified, but he foresees that an
early budget revision (perhaps as soon as April) will be
required to cut spending further as the economy slows. When
asked where such cuts would come from, Popescu speculated
that trimming public sector employee bonuses, freezing wages,
and leaving vacant positions unfilled would not be enough,
and the GOR would have to start laying off significant
numbers of workers. While Gherghina did admit that MOF had
prepared a more pessimistic set of budget assumptions (its
"Plan B") in case economic growth was below the official
target, these numbers still assumed positive growth and a
government deficit of not more than 2.8 percent of GDP. For
his part, Popescu found the "Plan B" scenario still too
optimistic; he predicted zero or slightly negative GDP growth
this year and significant spending cuts in the second quarter
to try to keep the deficit within manageable limits.


4. (SBU) EconCoun pressed both officials to mitigate the
negative impact on U.S. companies of the GOR's budget
troubles, particularly by paying arrears owed to U.S.
contractors and refunding long-overdue VAT reimbursements.
While assigning the blame for these problems to the previous
Tariceanu Government, both Gherghina and Popescu agreed with
EconCoun that this issue needed to be resolved quickly in
order to maintain the confidence of foreign investors.
Gherghina asserted that he had taken a proactive approach by
ordering a review of unpaid invoices, and was surprised to

BUCHAREST 00000115 002 OF 003


find some that were over 1,000 days old. He told EconCoun
that he was sending audit teams to check overdue invoices
with an eye toward resolving any difficulties and paying them
immediately, and that new Finance Minister Pogea had
repeatedly raised this issue with his counterparts at other
Ministries. Saying that the former government appeared to
have tried to "break the deficit" by withholding VAT refunds,
he said that this practice had ended and that his goal was to
have all overdue refunds paid by the end of March at the
latest. Gherghina seemed surprised to learn that many
companies have complained about difficulties in obtaining
responses from working-level MOF staff. He promised to
address customer service issues and invited post to bring
future such concerns to his personal attention.


5. (SBU) EconCoun provided both Gherghina and Popescu a copy
of a February 10 letter to PM Boc signed by the Charge, in
conjunction with the Dutch, Italian, German, and British
Ambassadors, protesting the GOR's decision to freeze 2009
contributions to the mandatory "pillar two" private pension
funds at the current 2.0 percent level, rather than
increasing them to 2.5 percent as stipulated in the national
pension law. (Comment: Under Romania's revised pension
system, pillar one refers to traditional GOR-funded pensions;
pillar two combines the traditional pension with worker and
state contributions to individual retirement accounts,
administered by private fund managers and largely invested in
government treasuries; and pillar three consists of optional
retirement accounts invested, for the most part, in the
Romanian stock market. End Comment). The freeze is a
priority concern for the association of private pension fund
managers, which includes U.S. company AIG. The firms worry
that the reduced contribution this year will not only prolong
the already lengthy break-even horizon on their investment,
but will also undermine confidence in the private pension
system by establishing a troubling precedent that the terms
of the system are subject to the annual budget whims of the
Government and not to the law itself.


6. (SBU) Both Gherghina and Popescu acknowledged that the
amounts the GOR would save through the freeze were relatively
small, but said that the trade unions remain implacably
opposed to private pensions and had demanded the measure as a
tradeoff for accepting the GOR's proposed 3.3 percent hike
(2.3 percent from employers, 1.0 percent from employees) in
social security taxes. Popescu explained that the Finance
Minister had fought a losing battle to maintain the 2.5
percent contribution, but that a "political decision" had
been taken to cede to the unions, in part to avoid potential
labor unrest. While Gherghina held out a small hope that
additional discussions may result in a reversal of the
decision, Popescu categorically stated that would not happen
this year. In fact, both Popescu and Gherghina noted that
the trade unions had reintroduced a proposal, defeated last
year, to require private pension fund managers to guarantee
an annual rate of return at least equal to the rate of
inflation, a measure which, if passed, would effectively end
the private pension experiment in Romania.


7. (C) EconCoun also queried Popescu regarding progress in
accessing EU structural funds and the internal dynamics
within the PSD-PDL coalition. Popescu expressed frustration
that more had not been done on accessing EU structural funds
under the previous Government. He said that PM Boc has set
up an inter-ministerial working group to focus on the issue,
and that Boc himself attends these meetings on a bi-weekly
basis to try to identify and resolve any roadblocks.
However, Popescu noted that most of the funds are targeted at
localities, which often lack the administrative savvy to take
advantage of them. A major hindrance was the lack of
technically competent local officials able to fill out and
implement an EU grant. Another major deterrent is that EU
funds often require 10-25 percent co-financing for projects
up front, but the financial downturn has made obtaining
credit for this purpose much more difficult. On the
coalition, Popescu shared the consensus view that it is
functioning surprisingly well ("much better than I personally
expected") and would almost certainly hold together through
European Parliament elections in June, if not the
Presidential election later in the fall. Echoing the opinion
of other interlocutors, he noted that the coalition as
currently crafted is a very delicate balance, one which would
likely collapse if either the PSD or the PD-L were to lose
significant ground in public opinion surveys as elections
approach.


8. (C) Comment. Gherghina and Popescu are both "re-treads"

BUCHAREST 00000115 003 OF 003


from previous governments and have solid, and only mildly
partisan, economic credentials. Their straightforward
analyses offer a refreshing change from the sometimes
off-the-cuff economic pronouncements of the prior Government,
but it is clear that the political balance of economic
policymaking has still not tipped entirely in these
technocrats' favor. Political considerations and the
relative balance of power remain at least as important as
competently managing a deteriorating economic situation.
During the visit, Gherghina received a call from Finance
Minister Pogea, and in whispered tones insisted to an
apparently reluctant Pogea that he really was expected to
appear in Parliament that day to answer questions about the
budget and could not skip out on this duty or pass it to the
Prime Minister. Gherghina also noted it was he, not Pogea,
who had introduced important MOF proposals in Boc Cabinet
meetings. Ghergina, who comes from the PSD and occupied the
same State Secretary position from 2001-2004, appeared to
have a political minder at the PD-L-dominated MOF in the
guise of an administrative assistant, who sat in on our
meeting and furiously scribbled notes whenever Gherghina said
anything even slightly controversial. Still, the presence in
the new GOR of competent economists like Gherghina and
Popescu does not necessarily translate into good fiscal
policymaking, even in a crisis. Both interlocutors had a
hand in crafting the budget, but were surprisingly honest in
acknowledging that it will be obsolete almost as soon as
Parliament approves it. End Comment.
GUTHRIE-CORN