Negotiations end: Romania borrows €20 billion

Romania yesterday finalized negotiations with international financial institutions for a foreign loan. The announcement was greeted by lenders, but businesspeople fear the financing package will not be sufficient to unblock lending and help the economy rebound.

The country is to borrow some €20 billion, of which more than a half, or €12.95 bln from the International Monetary Fund (IMF). The European Commission will provide a further €5 billion, while €1-1.5 bln will come from the World Bank, and the remainder from other financial institutions.

The IMF loan is based on a two-year stand-by agreement, at an interest rate of 3.5 percent.

The head of the IMF mission to Romania, Jeffrey Franks, said that the interest rate depends on international market references, to which a margin is added, based on the value of the loan.
The EC loan will be for five years. Initial funds will arrive in Romania in July, with interest based on market conditions and the size of the tranche. Romania's representative to the IMF, Mihai Tanasescu, estimates that the interest rate for this loan could amount to 2-3 percent. "The interest rate will be set when the EC goes out to collect this money for Romania. When a portion of money is due to be sent [to the debtor country], the EC borrows funds from the market, and the interest rate depends on the market at that time," Tanasescu explained. During negotiations for the financial package, it was decided that Romania will need to comply with some macroeconomic conditions to access the funds. Thus, the budget deficit must narrow to below 3 percent of gross domestic product (GDP) by 2011, according to EC representative Filip Keereman. By EU standards, the country's deficit this year is set to amount to as much as 5.1 percent of GDP. Furthermore, Romania must handle its inflation rate, which must be maintained at the level targeted this year by the National Bank of Romania (BNR), of 3.5 percent +/-1 percentage point.
After voicing support for the need for an IMF agreement, businesspeople and bankers now have varying opinions on the impact of the financing package.

As banks welcome the decision, business environment representatives indicate that the funds are insufficient or that these will be of no Real help to unblock lending, and implicitly the economy. "It will depend on where funds are going. This is the main problem of the agreement," according to the President of Impact developer, Dan Ioan Popp. The President of Flamingo International retailer, Dragos Simion, does not believe that the loan will unblock lending, "because this will generate an increase in consumption, and have a negative effect on the budget deficit". However, businesspeople agree that the funds could help stabilize the exchange rate, and could improve the country's image in the eyes of foreign investors. Frederic Oudea, the General Manager of Societe Generale lender, which controls the second-largest local bank, BRD, said the loan agreement is "good news," which confirms the confidence of the foreign environment in Romania and the country's capacity for growth. "We would have been committed to Romania even without the IMF agreement," Oudea added.

Business Standard