ROMANIA WON'T MEET 2009 IMF OBLIGATIONS, BASESCU

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

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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