The worst moments are already behind for the Romanian banking system, was the conclusion of a recent study by Thomson BankWatch. Those moments may be already behind, but this also means hard times are only now beginning for banks. So far banks have been those air-conditioned places with people queuing occasionally in front, but now they must become what their name says - mediators of liquidity in the real economic system.
A few years ago, after long years of transition, the controversial World Bank economist, Joseph Stiglitz, said that in the socialist system there are no real banks, as they do not exist in the incipient stages of transition - institutions which go by this name are rather "nominal banks," which will develop into "real banks." The fact that today even the more developed Romanian banks, sold to Western companies, have not developed products for the populace, hesitant even to lend to the real economy, shows that real banks have yet to appear. The good news is that soon, the conditions will be in place for them to appear. After Banca Agricola is re-capitalised with the $100 million it is awaiting from the state, after CEC's fate is settled, after a few ailing banks have consumed their agony, only then we will have the conditions in place for the credit market to approach the classical model.
On the other hand, potential problems with CEC could perpetuate a certain instability - if CEC loses the trial against SOV Invest, and the Government is unwilling to cover the losses from budget sources. But the probability for both conditions to be met is fairly low, although non-zero.
Nevertheless, a glance at the main financial indicators in the Romanian banking system in the latest years says something. A year ago, when the fate of Bancorex was debated, they said that after restructuring, the bank would be smaller, but healthier - the phrase can be repeated for the whole of the banking system. Whereas in 1995, the golden period for banks (at least in terms of foreign contracts), they lent more than 100% of the money supply (M2), in May this year crediting in the economy was only 67% of M2. This note, coupled with the fact that money supply as a ratio against GDP has dropped, does not mean that, globally, the real Romanian economy is receiving increasingly less money from banks. A fact long observed by analysts in the lack of financing for Romanian companies. Under these circumstances, the struggle against arrears is one against windmills as it develops concurrently with the recovery of the banking system.
To return to the structure of domestic lending, another common-sense note is that government credit is accounting for an increasingly larger share - credit to the budget, therefore, not to state companies. These developments correspond to the consistent deficits ran by the Finance Ministry over the years, and with the abnormally high interest rates on the inter-bank market. Again, we return to the banking system - because the Treasury's hunger for cash was not the only factor that boosted the interest rate on treasury bills in the previous years, but there was also the liquidity shortage in "troubled" state banks. The result is that ever less of the ever lower credit extended by banks is reaching the real sector, state or private.
As to the structure of credit depending on maturity, one can observe a rapid growth of the credit share in the short term to the detriment of medium and long-term credit. Whereas in 1995 medium- and long-term credit was 7.1% of the government credit, today it is only 5.6%. On the other hand, hard currency credit has grown from 26% in 1995, to 39% now. The avoidance of long-term credit and the attraction to hard currency credit are two classical characteristics of transition, but in Central European countries, they are levelled as things advance to normality, as banks and enterprises enact stable relationships.
Inflation is a control factor with a very strong influence both on the structure of credit maturity and the evolution of credit mass. Also, the de-monetisation of the Romanian economy can easily be traced to the efforts made to overcome inflation periods. Without being unanimously accepted, there is the working hypothesis that after inflation is brought into the "moderate" range (15-40%), the relaxation of money supply, even at the expense of rising prices, is beneficial to the overall economic evolution. Through the hidden assumption that credit relations have reached an acceptable normality, this is not applicable to Romania.
A relaxation of money supply can have beneficial effects, with the fresh credit it brings in the economy, only when the credit structure is natural, and not perverted, as is the case in Romania. Only a drop in inflation can regulate the structure of domestic credit and its mass against the main monetary aggregates. On one hand, lower inflation will diminish the domestic debt service, and, proportionally, the weight of government credit needed to roll over contracted debt, and on the other, low inflation will favour the emergence of medium- and long-term contracts between banks and real economic agents. An acceptable stability of the exchange rate, consistent with the low-inflation scenario, would rule out currency risk, diminishing the weight of hard-currency credit.
Indirectly, by restraining credit volumes, inflation contributes to perpetuating arrears, a critical point in discussions with the International Monetary Fund. Ordinance 95/2000, a last-moment solution, deserves a lot of criticism for breaching the criterion of competition, but it is somehow justified as the natural solution is not available to companies entrapped in financial arrears.
Most of these companies, from Conel to the smallest enterprise, pretend they are profitable but their clients rarely pay. Besides the fact that insolvent demand is not demand but a mere illusion, and only a company with no solvent demand resorts to it, there is always the solution of credit. In an economy where things go smoothly, a company with such problems can contract a loan, and upon receiving payment, along with the requisite penalties, things go into normality. None of these criteria is met in our case - on one hand, client-supplier contracts are vague, and credit is inaccessible.
As to the quality of credit, it has improved considerably in the last 12 months, to match the expenses made by the state to restructure the Bancorex portfolio. While at the end of the first quarter of 1999 the weight of overdue debt among non-government credit was 32.2%, at the end of May this year the same parameter was only 14.7%. And if the value was the same for the end of 1996, this does not mean the banking system is in the same state of health. Prudence criteria imposed lately make the 14.7% weight in 2000 indicate a banking system much healthier than the one in 1996, although smaller.
The stability BCR displayed to deponents' anxiousness was a test of this health. This can be asserted, although things are not exactly so, for at least two reasons - the structure of BCR assets and liabilities. After the restructuring of Bancorex, the portfolio of the largest Romanian bank was extremely liquid. On the other hand, the weight of popular savings, the rumour-sensitive segment, was lower in small private banks, which fell prey over time to the instability of the banking system.
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