Isarescu: Banks' behaviour during the crisis much normal than the fiscal policy

The adjustments in the economy are important for maintaining the balance in the triangle made up of economic growth, inflation and external deficit, Mugur Isarescu, the Governor of the National Bank of Romania, stated yesterday during a debate organised by the Central bank. Nevertheless, the correction of the external deficit entails inflation costs if it is done through the exchange rate. Likewise, it entails economic growth costs if it is done through the lowering of credit or through the slowing down of budget expenditures. There could be inflationist costs if the external deficit's adjustment is done through the hiking of taxes.

Isarescu considers that our country's priority for this year is the adjustment of the external deficit. Thus, the external deficit is unsustainable from the point of view of big figures. 'We had reached a level of 13.5 per cent in 2008 down from 14 per cent in 2007, which means 25 per cent of GDP. When it comes to the correction of the external deficit we are still below the optimal level. We are in an excessive correction and that is why it is reflected in the GDP. An 8 per cent of GDP correction is enormous and that is why the private sector is displeased. This excessive correction also stems from the external crisis. We are below the optimal level also because we cannot use the fiscal policy too,' the Governor explained.

At the same time, Isarescu considers a new debate for this summer, a debate on 'how do we resume economic growth?'

The Romanian economy no longer needs a big growth in the following period, the Governor said. The authorities' main preoccupation should be to find the growth resumption mechanisms. A 10 per cent correction could be dramatic for the external deficit.

The economy should recover after the adjustment since the convalescence period is important, Isarescu added. He stated that the adjustment of the external deficit and a high economic growth cannot take place simultaneously.

'We cannot use the fiscal policy. We have to learn why it is important for the economic policies, particularly the fiscal ones, not to be pro-cyclical. It is difficult to ask the commercial banks not to be pro-cyclical. The banks almost behaved normally. They learnt their lesson and I believe they will be more cautious from now on. But the fiscal policy has to be anti-cyclical' Isarescu said.

Moreover, the BNR Governor claims that confidence is also a key element in overcoming the crisis and gave assurances that the Central Bank has reserves that can be used in an anti-cyclical way. He explained that in January - February the problem was the RON's depreciation and that nobody talked about economic growth, while the difficult situation is currently caused by the recession and by the fact that the GDP drop is slightly larger.

The bank deposits interests should be situated below the monetary policy rate, namely below 9 per cent per year, because the banks could cover their short-term liquidity needs from the Central Bank, Isarescu said. The Central Bank Governor believes that the interest rates will drop in the immediate period and he rejects the mass-media's analyses that argue that a return to normality could take place in 6-12 months.

According to Isarescu, the high rates practiced by the banks are counterbalanced only by the negative information and analyses regarding Romania, analyses that stop a high capital influx. The analysts consider that the BNR's reduction of the monetary policy rate and of the required reserve ratios, moves that have freed up approximately EUR 2 bln, will initially lead to the drop of the interest rates on the inter-bank market and subsequently of the credit instalments offered by the banks.

Talk about collapse, recession and unemployment freeze any appetite for crediting

The agreement with the International Monetary Fund (IMF) and the European Union represents an anti-crisis program and that other 'shock and awe' programs need to complete it, the BNR Governor claims. He pointed out that the current problem consists of the resumption of economic growth, with most of the correction being already consumed.

In Isarescu's opinion, the moments of tension have passed both for the foreign currency market that registered a high volatility and for the monetary market who was blocked for two months.

Isarescu states that the dominant note of the agreement with the IMF consists of moderation and underlined that an economic growth prognosis of -4 per cent, a projection with which the BNR operates too, cannot be considered optimistic.

The banks' appetite for offering credits and the customers' appetite to contract loans are 'frozen' by the talks on recession, collapse and unemployment, the BNR Governor considers. He explained that at this moment the very high interest rates for both deposits and credits discourage the clients from contracting credit lines.

Nine O'Clock