ROMANIA: INCREASINGLY GLOOMY 2009 OUTLOOK SETS

C O N F I D E N T I A L SECTION 01 OF 03 BUCHAREST 000180

SIPDIS

STATE FOR EUR/FO DAS GARBER, EUR/CE ASCHIEBE,
EUR/ERA, AND EEB
TREASURY FOR JBAKER AND LKOHLER

E.O. 12958: DECL: 03/18/2019
TAGS: EFIN ECON PREL IMF EUN RO
SUBJECT: ROMANIA: INCREASINGLY GLOOMY 2009 OUTLOOK SETS
STAGE FOR IMF STANDBY AGREEMENT

REF: STATE 23758

Classified By: Charge d'Affaires Jeri Guthrie-Corn for reasons 1.4 (b)
and (d).

SUMMARY


1. (C) Romania needs the stability of an IMF agreement to
finance the private external debt gap, protect foreign
exchange reserves, and advance structural reforms in a
difficult political environment, officials told DAS Judy
Garber and U.S. Treasury visitors in meetings March 10-11.
Still, Romanian officials insisted that the domestic banking
sector remains relatively sound and played down fears that
potential troubles at parent banks in Western Europe would
force these banks to pull capital from local subsidiaries.
The Government of Romania (GOR) now expects 2009 economic
growth to range from minus 0.5 to plus 0.5 percent, and
acknowledges that the budget just passed by Parliament will
require major revisions as growth and revenues slow. Even
so, officials do not favor a "regional approach" which treats
Eastern Europe as a bloc, and said that international
financial institutions (IFIs),the EU, and investors should
judge each country on the basis of its own fundamentals. End
summary.

"WE DON'T NEED A REGIONAL APPROACH TO THE CRISIS"


2. (C) The Charge d'Affaires and visiting DAS Judy Garber,
along with Jeffrey Baker and Lukas Kohler of U.S. Treasury's
Office of Europe and Eurasia, met with National Bank of
Romania (BNR) Governor Mugur Isarescu and Minister of Finance
Gheorghe Pogea on March 10-11 to discuss the macroeconomic
situation in Romania and to convey some of the USG's concerns
expressed in reftel. Baker and Kohler also met separately
with other officials from BNR, MOF, private banks, and
resident representatives of the IMF, World Bank, and EBRD.
Governor Isarescu explained that the financial crisis,
beginning last fall, did not have a direct impact on
Romania's financial sector, but that the real economy has
been hit by an escalating series of secondary effects since
then: exchange rate depreciation; drying up of credit (with
Western banks shifting quickly from a posture of "aggressive
generosity" to "aggressive pessimism"); a drop in production,
especially in industries closely integrated with the rest of
Europe; and a sharp decline in real estate prices. These
economic shocks are increasingly being felt through rising
unemployment, lower personal and corporate incomes, and
declining revenue flows into GOR coffers.


3. (C) Isarescu noted that Romania's external public debt as
a percentage of GDP is low, but private external debt (at
more than 24 billion euros) is substantial. Of this, credit
lines from mother banks to subsidiaries represents 40 percent
-- and Isarescu went to pains to emphasize that parent banks
have made "firm guarantees" to BNR to renew the large
majority of this credit -- but covering the other 60 percent
of non-bank sector debts is BNR's biggest concern and would
be the focus of an IMF program. Isarescu personally believes
Romania will still eke out slightly positive growth in 2009,
though this will depend heavily on government revenues and
spending; the "best case" scenario is to "hold the line" this
year without a visible decrease in living standards. When
asked about calls for a "regional approach" by the EU and
IFIs to Eastern Europe, particularly given the risk of
regional contagion, Isarescu was skeptical. Romania doesn't
need to be "rescued" with the whole region but rather to be
judged fairly on the basis of its own fundamentals, Isarescu
replied.


4. (C) Finance Minister Pogea echoed Isarescu's theme,
saying that while coordination with other EU member states to
confront the crisis is a top priority, Romania does not need
a "one size fits all" regional approach; the GOR simply asks
that other governments avoid protectionism and take measures
to ensure the stability of their banks with operations in
Romania. "Beyond that, we will take our own measures," he
insisted, pointing out that the impending arrival of an IMF
negotiating team was at Romania's behest. Pogea described
his frustration, just two months into office, of grappling
with the runaway spending and substantial arrears left by the
previous government; paying off those arrears and then
bringing spending under control is the new GOR's biggest
fiscal challenge.


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5. (C) After describing interim measures the GOR is taking
to shore up social safety nets, Pogea acknowledged that the
recently-passed budget will have to be revised downward very
soon, and that public sector wages and benefits will be a
major target. (Pogea noted that public sector personnel
costs have risen by three percent of GDP in four years, while
government productivity hasn't risen at all.) Under the
auspices of an IMF program, the GOR will undertake structural
reforms to streamline its budget and spending processes and
simplify the tax code, changes which would be needed even if
there were no crisis, he said. Pogea believes 2009 growth
will hover near zero but will be "nothing even close" to the
negative three or four percent the IMF and some others are
forecasting, he concluded.

BANKING SYSTEM RESILIENT, BUT DEBT FINANCING A CHALLENGE


6. (C) BNR recognizes that problems with mother banks in
Austria, Greece, and elsewhere could pose trouble for
Romania, but the Central Bank's tough supervision and
monitoring regime provides the necessary oversight to ensure
the overall health of the domestic system, BNR Director of
Supervision Nicolae Cinteza told the U.S. Treasury visitors
on March 9. Cinteza pointed out that he has existing
statutory authority to compel any local bank to increase its
share capital, and has the power to suspend the voting rights
of the majority shareholders if they fail to comply. The BNR
believes that this measure, as well as the high foreign
currency reserve requirements, makes it unlikely that a
foreign shareholder will ever find it in their best interest
to withdraw entirely from the market. Commercial bankers
reaffirmed this message in separate meetings, saying that
their banks were sufficiently capitalized and that they did
not expect parent bank turmoil to cause them to stop
operating locally.


7. (C) Overall GOR and commercial bank forecasts are neutral
or borderline negative. MOF Director of Macro-Economic
Analysis and Policy Dorin Mantescu provided growth forecasts
for next year closer to the consensus forecast (negative 0.5
percent to zero growth in 2009) than the MOF had provided
previously. Pressures on the debt market are also expected
to continue according to the Director of Treasury and Public
Debt, Stefan Nanu, despite efforts to front-load government
borrowing in the first half of the year. Expecting a
government deficit of 5 billion RON (1.5 billion USD),Nanu
believes the GOR will be able to borrow this amount on the
local market, but acknowledges the increasing interest burden
caused by banks' preference for shorter-term debt at
relatively high interest rates. (Note: The MOF auctioned 2
billion RON in six month treasury bills on March 16th with an
average yield of 11.49 percent. End Note.)


8. (C) Of the major banks, Chief Economist Lucian Anghel of
BCR-Erste was closest to the Ministry of Finance's estimates,
predicting growth of 2-3 percent above the euro-zone, but
acknowledging that this might very well mean that Romania's
growth is mildly negative for the year. BRD-Societe General,
another major bank on the local market, however, believes
that growth will be positive for the year at 1-2 percent.
The BRD Chief Economist, Florian Libocor, is strongly of the
opinion that Romania is being unfairly lumped together with
other countries, and expects macroeconomic performance for
Romania in 2009 to be substantially better than others in the
EU.

IMF, BANKS AGREE AN ASSISTANCE PROGRAM NEEDED


9. (C) The local IMF representative, Juan Fernandez-Ansola,
told the Treasury visitors that he fully expects an agreement
to be reached before the IMF team currently in country
departs. Preparatory discussions involving the BNR and the
MOF were recently held in Washington. An agreement will
ultimately depend on Romania's adopting what the IMF
considers a "realistic" macroeconomic outlook for 2009 and
the budget and revenue projections to match. This will
likely result in a larger fiscal deficit than the GOR would
like, but Fernandez-Ansola noted that the GOR must end the
current practice of multiple budget rectifications (to adjust
for revenue changes) throughout the year if they hope to
benefit from an IMF program. BRD and BCR were both in
agreement that an IMF program was probably advisable at this
point, although they did evince some frustration that Romania
has been driven to it by the court of market opinion, rather
than a hard-headed look at economic fundamentals. The

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difficulty is going to be selling a package politically,
after so many political leaders (including President Basescu)
staked out a strong position opposing recourse to the IMF,
contacts said. According to Fernandez-Ansola, BNR Governor
Isarescu has convincingly made the case for an IMF program
directly to Basescu and Prime Minister Boc, both of whom have
become much more open toward an IMF program in their public
statements in recent weeks.

COMMENT


10. (C) While internal GOR consensus has converged toward
the need for an IMF program -- a major shift in position in
just the last two months -- there are still potential
roadblocks ahead. The Government could yet face significant
opposition from public sector unions, which have vowed
protests and work stoppages beginning next week if officials
attempt major cuts in wages, benefits, or positions, even if
"mandated" under an IMF rubric. This is a problem largely of
the politicians' own making, since officials from PM Boc and
PSD leader Mircea Geoana on down all fell over themselves to
make sweetheart promises to core constituencies in the late
2008 parliamentary election campaign; they now find they must
not only renege on most of those promises of big increases,
but may have to impose further cuts. Public sector employees
have been left with a substantial perception gap between what
they believe they deserve and what the GOR can actually
afford. Geoana's and the PSD's roles as potential spoilers
are another factor; statements by Geoana suggest he is
already positioning himself as champion of the downtrodden
against Basescu and the PD-L if IMF-mandated austerity
measures spark popular resentment. This could well become
one of the defining themes of the fall presidential election
campaign.


11. (C) Comment continued: In the meetings with Isarescu
and Pogea, as well as other recent conversations with
interlocutors, post detects little sense that Romania
believes big EU members should be doing more in terms of
stimulus measures or that a regional rescue package for
Eastern Europe is warranted. Indeed, in the wake of calls
over the last couple of months for such an approach from
Hungarian and Austrian leaders, Romania has been
conspicuously silent. Romanian officials fear that a
regional approach will not take proper account of their
particular situation, just as they believe that talk of a
regional contagion unfairly lumps Romania with other
countries (Hungary, Baltics, Ukraine) where the situation
appears worse. There may still be an element of denial at
work here, but Romanian sentiment seems to be that persistent
talk of the need to address a "regional" problem may
contribute to spreading the very illness that such medicine
is ostensibly intended to prevent. End Comment.
GUTHRIE-CORN