FinMin borrowed EUR 5 bln to finance budget deficit

The Finance Ministry borrowed more the EUR 5 billion this year, pressed by the void in the social security budget, the payment of salaries in the public system and the arrears to companies in value added tax (VAT) reimbursement. These funds are close to the equivalent of the budget deficit scheduled for 2009, of 4.6 percent of a gross domestic product (GDP) estimated at EUR 123.53 billion.

The money include funds attracted through state bond issues (some €2.5 billion in the first six months, rollover of due state titles not included), €1 million club loan contracted by commercial banks and a first tranche worth €1.5 billion from a loan agreed with the European Commission, which is expected to be sent to Romanian authorities today, according to Finance Minister Gheorghe Pogea.

Regarding the club loan, President Traian Basescu yesterday confirmed the information published by Business Standard in the previous edition saying that the state borrowed €1 billion from commercial banks.

This year, the state secured financing from the local market at 10-14 percent interest rates (for lei) and from international financial institutions, paying an interest rate slightly above 3 percent for euro loans. Furthermore, an Eurobond issue scheduled for September could have a 7 percent interest, according to investment bankers. Adding the Eurobonds and a loan from the World Bank (WB), the funds borrowed or that are to be borrowed by the Romanian state amount to €7.16 billion, or 5.66 percent of the estimated GDP. This could mead that the government is seeking to secure funds for a higher budget deficit than the 4.6 percent agreed earlier this year, when it signed an agreement with the International Monetary Fund (IMF) for a €12.5 billion loan.

However, the deficit could be maintained below the targeted limit, if the Finance Ministry decides to buy back some of the state titles. Bond issues were mainly short term, with maturities starting from one week to three years. The latest issues had an average 10 percent yield, compared to yields exceeding 14 percent in the beginning of 2009. Meanwhile, a first tranche from the IMF loan, worth €5 billion, already entered the reserves of the National Bank of Romania (BNR). For the money borrowed from the IMF, the state is paying interest of 3.5 percent.
The Finance minister recently said that, in order to finance the deficit, some €2.5 billion from the European Commission are to enter the Treasury, a €1.5 billion tranche in July and a second one, worth €1 bln, in the fourth quarter of 2009.

Furthermore, the World Bank will send €660 million this year to local authorities - €300 mln in September and €360 mln in December, with interest rates of some 3 percent. Romania needs foreign financing due to a worsening of the local economy and, implicitly, a decline in budget revenues. An IMF mission will analyze the economic framework in August. The macroeconomic targets are likely to be modified, given that fund experts currently foresee a 7-8 percent economic decline and budget deficit of as much as 7 percent of the GDP.

Business Standard