Mar 25, 2009 | 18:24 GMT

3 mins read

Romania: A Loan From the IMF

Romania secured a 20 billion euro ($27 billion) loan from a group of international lenders March 25 led by the International Monetary Fund (IMF), as well as the European Union, the World Bank, and the European Bank for Reconstruction and Development (EBRD). Most of the standby credit line will go directly to the country's central bank, which will then distribute the funds to the private sector and finance the growing budget and trade deficits. Romania will have a chance to account for its many pressing needs during this period of foreign capital flight and get cash flowing in the system as it receives its first 5 billion euro ($6.7 billion) installment of the loan before the "summer of rage" approaches and makes its presence fully felt. STRATFOR reported in October 2008 that Romania's economy would be hit especially hard by the sweeping economic recession and that an IMF/EU rescue was likely. This is due to the country's poor economic fundamentals — shared by many other states in the region — including a sizable budget deficit (4.8 percent of GDP) and a high trade deficit (14 percent of GDP). These financial difficulties have become increasingly difficult to finance during a liquidity-starved financial crisis, and were compounded by the credit downgrade to "junk" status Romania received in October 2008, making bond issuance even more difficult for Bucharest. Romania is especially sensitive to foreign capital and involvement within its borders, and is heavily burdened by the euro and Swiss franc-denominated loans it took out from foreign banks. The IMF loan is important to keep the Romanian leu stable in order to repay these foreign loans and avoid having a large proportion of them become non-performing. Additionally, the IMF loan must address negative consequences of the global crisis to Romania's foreign-dominated industrial sector, which has experienced plant slowdowns and layoffs as nationwide industrial output has plummeted by more than 12 percent year-on-year in January. But, as with any IMF assistance, this loan comes with conditions attached and will certainly create social friction in Romania. The IMF has set a budget deficit target of 4.5 percent of GDP, which is significantly lower than the projections made for 2009. Because this is a short-term credit line, the government will be forced to curb spending as well as increase taxes in order to meet this goal. At a time when wages are falling and unemployment is rising, such actions will fuel public unrest. These social pressures will come to a head when Romanians go to the polls for the presidential election at the end of 2009.

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