The state took out a foreign loan from for foreign public institutions - the European Commission, the International Monetary Fund and EBRD, to offset the exit of the foreign private capitals, NBR governor Mugur Isarescu explained yesterday.
"Romania realised that it was no longer in the position to have net capital inflows in the private sector - which is preponderant, but net outflows (...) We compensate for this exit with public capitals," Isarescu told an extraordinary press conference, organised at the National Bank. The conference was organised after the conclusion of a foreign financing agreement had been announced on Wednesday, whereby Romania will get 12.95 billion euros from the International Monetary Fund, 5 billion euros from the European Commission and one billion euros from the World Bank and EBRD each. The funds will be possible to draw over two years.
Isarescu therefore accepts what he dismissed less than a month ago, when he was wondering why the state should have to take a loan to cover private debt.
The Governor said that after foreign private capital inflows had amounted to 16-17 billion euros in 2008, this year they would stand at only 4-5 billion euros, which entails an adjustment.
"There were two ways: a huge adjustment of the economy, which had developed with foreign funding. No economy can adjust by 7% of the Gross Domestic Product in one year. We'll go with the second option, we'll perform a certain adjustment of the economy and balance of payments."
The current account deficit should go down to 7-8% of GDP this year, from more than 12% in 2008. The adjustment began last year, when the deficit narrowed from more than 13% of GDP, the peak reached in 2007.
The very high level of the current account deficit, which caused a significant increase in foreign debt - especially in the private sector, was the main argument Standard & Poor's and Fitch rating agencies used last autumn when they lowered Romania's rating below the investment grade level.
Isarescu also explained that the funds from the IMF, which will become part of NBR's foreign currency reserve, would allow freeing up the amounts deposited by commercial banks as minimum mandatory reserves.
"With the IMF loan we'll replace part of the foreign currency reserves borrowed from commercial banks. I say borrowed because NBR pays interest, takes a share of the banks' liabilities and keeps them in its account."
A delegation comprising the Fund's representatives, as well as NBR's first deputy governor Florin Georgescu and the Supervision chief Nicolae Cinteza, met in Vienna yesterday in an attempt to persuade foreign banks with subsidiaries in Romania to continue to provide financing. There has been talk lately about the possibility of banks using the funds freed up from the reserves deposited at the NBR to repay the lines of credit taken from their shareholders abroad.
Isarescu says NBR will lower the minimum mandatory reserves, but the decrease would be "extremely gradual". At first it will adjust the calculation base and then the reserve percentage.
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