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Op-Ed

Romania Headed toward National Bankruptcy

Anton Caragea, June 19, 2009

Romanian shepherds shout anti-government slogans in front of the Romanian National Sanitary-Veterinary Agency in Bucharest on February 12. (Photo: Daniel MihailescuI/AFP/Getty Images)

The implications of the world economic crisis are starting to severely cripple the Romanian economy. In the last six months, negative news has been poring. Stock exchange values have decreased by more than 60 percent, and industrial and agricultural production has seen a sharp decline. The forecast for the rest of the year is even blacker: the escalating financial could devastate the Romanian economy.

Budget in crisis

At the beginning of the year, the new government of Romania registered a sad record, becoming the first government in the last ten years that was incapable of promoting a budget. For three months, the Romanian administration and economy was confronted with an unprecedented situation: being forced to act with no budget and no resources. At the four-month mark in April, the Emil Boc government succeeded in passing through Parliament its budget that was intended to put an end to the crisis.

But when the budget was finally accepted, the government was hit with a terrible realization. One billion dollars of the budget was to be covered by the General Motors (G.M.) investment in Craiova Car Factory, and it became clear that G.M. would not be able to pay its $1 billion debt. To Romania, this amount is no small change.

Financial storm gathering

The budget quickly became unrealistic. At the end of May, local administration announced that it had already consumed all the money allocated for the year. With low tax revenue caused by the reduction in economic activity, almost sixty of the cities in Romania are bankrupt and requesting state help.

On June 1, the National Fund for Retirement Pension announced its bankruptcy. In 2008, the Fund lost 800 million lei (almost 250 million euro) and in 2009 almost 300 million more, putting its numbers well in the red. The Fund will not be able to pay retirement pension to the people in the social welfare system.

Other statistics are equally somber. Unemployment has risen to 10 percent (official figure), but the unions are estimating that the number is actually around 15 percent. The budget deficit is increasing sharply despite all governmental efforts to reduce it, and already the European Union Commission has announced the beginning of procedure against the Romanian state for excessive deficit.

Real estate values collapsing

The real estate market has virtually ceased to exist. Transaction has decreased by 90 percent, and credit for real estate has frozen. (Only ten people have received bank loans for real estate investment in 2009.) Price slides have made fortunes disappear. Prices have dropped from 3,000 euro per square meter in 2007 to below 300 in May 2009.

This collapse has affected financial and investment markets and provoked a huge storm of bankruptcy. In the leasing field, the number of firms has been cut in half, and a new tax system has caused a wave of closing down small enterprises.

Bank system failure

In January, the general manager of Raiffeissen Bank announced that he will be forced to close operations in Eastern Europe without Romanian support. Central Europe Bank made a similar announcement, and National Bank suspects that ten of its major banks will close within two years. To avoid a collapse of the system, banking institutions will need to see over $10 billion in state support by the end of this year.

I.M.F. loans: saving the economy or burying Romania?

In mid April, the government claimed it had the solution to the country’s economic crisis: a loan from the European Union and the International Monetary Fund (I.M.F.) of 20 billion euro to reshape the economy and cover pending expenses. But the dream was short lived, and short sighted.

The loan was accompanied by very strict I.M.F. regulations that will take control of the Romanian economy, an agreement similar to one that in 1996 ended in Romanian economic collapse. No Romanian wants to repeat that experience, but the image of 20 billion euro entering the Romanian economy put fears to rest. Now, two months after the I.M.F. loan injected the first 5 billion euro into the economy, the results are tragic. Two and a half billion has been wasted in keeping the national currency from losing value, and the other 2.5 billion was squandered on economic deficit balance. If the Romanian economy is wasting 5 billion euro in two months, this is an alarming signal, as it means the entire loan will not last through the end of the year. Many journalists speculate that the rush in accepting the I.M.F. conditions can be connected to corruption charges against a member of the Boc cabinet, considered the most corrupt in recent Romanian history.  

National bankruptcy: a working hypothesis

This grim picture is getting even darker. At the same time that Romania took a national loan of 20 billion euro, non-state firms took international private loans of more than 20 billion. So in two months, 40 billion has been burned through, partially in keeping appearances for an election year. The state effort in pulling out of the crisis the real estate sector (by First House Program) and car sectors (Change Car Program) failed tragically, offering no tangible results for the Romanian economy.

In the six years prior to this meltdown, the Romanian budget survived on foreign investments attracted by the favorable Romanian economic climate. In 2008, more than 12 billion euro were invested in the Romanian economy, sustaining the budget. This year only 1 billion euro were invested, which is completely insufficient in balancing the budget. The budget is now confronted with increased spending, a sharp decrease in tax collection, a national debt of 60 billion euro that is on the rise, and a private debt of more than 40 billion euro. As these numbers are impossible to sustain, the next year will see a new rush for credits with 10 percent interest.

Romania is entering the world crisis with a feeble financial system, a national debt that could reach 100 billion by year's end, and a condensing internal market. If this financial policy of the present government continues, national bankruptcy is not a hypothesis but certitude.

Anton Caragea is professor of International Relations and Political Science, and director of the Institute for Research on International Relations and Political Science in Romania.

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