tag:blogger.com,1999:blog-9184789383867539002024-02-19T22:54:19.280-08:00Romania Economy WatchUnknownnoreply@blogger.comBlogger116125tag:blogger.com,1999:blog-918478938386753900.post-44731558078599617322012-07-10T09:19:00.000-07:002012-07-11T04:49:54.408-07:00Whom The Gods Would DestroyThe Times They Are A Changin, as the old song goes. Neither in jest nor in total earnest was a truer word ever said in terms of the 2 year old Euro Debt Crisis. The to-ing and frowing of the last few days as the commitment to decision of the most recent summit <a href="http://www.economonitor.com/edwardhugh/2012/07/08/neither-grexit-nor-spexit-its-fixit-or-fexit/">started to wobble</a> only serves to underline how hard it is at times to change. These days I have no central "Euro" scenario. Only tail scenarios exist, under which the debt crisis veers in either one direction or the other accodring to the decisions taken or the absence of them. Naturally this makes the eventual outcome very hard to forsee, which is why the financial markets are having such a hard time of it, and why we see so much volatility. <br />
<br />
In the case of the full banking, political and fiscal union scenario the efficient causes which could make it happen are obvious: just keep the various participants looking down into the abyss often enough and long enough. In the case of complete breakup things are rather different, since it is hard to concretise what would actually bring it about, although the risk is evident, and indeed in many ways it seem a more probable end point than the other one. <br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj5SkgBTZDLwEc3jfF3S5znvqSJremKPm904gbi2wwxw86B6_1KQVU_Dpgy0XSg-TGT7a4qeddeM7FPF_ioYC3Bgje34kafB4e6nRHDlxSfe99rluTIAKPAXDnNFm3hgTj77BARxmR7D6d/s1600/2012-07-09_145011.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="115" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj5SkgBTZDLwEc3jfF3S5znvqSJremKPm904gbi2wwxw86B6_1KQVU_Dpgy0XSg-TGT7a4qeddeM7FPF_ioYC3Bgje34kafB4e6nRHDlxSfe99rluTIAKPAXDnNFm3hgTj77BARxmR7D6d/s320/2012-07-09_145011.png" width="320" /></a></div>
<br />
After thinking about this for some time, the conclusion I have reached is that it is towards political risk, and the progressive destabilising of Europe's democratic systems, that we need to look, which is what makes <a href="http://blogs.ft.com/beyond-brics/2012/06/26/romania-imf-remedy-starts-to-pay-off/#axzz207zvOQo2">recent events</a> in Romania look like something rather more than a mere historical footnote. <br />
<br />
According to <a href="http://krugman.blogs.nytimes.com/2012/07/05/guest-post-romania-unravels-the-rule-of-law/">Princeton Professor Kim Lane Scheppele</a>:<br />
<blockquote class="tr_bq">
"A political crisis has gripped Romania as its left-leaning prime minister, Victor Ponta, slashes and burns his way through constitutional institutions in an effort to eliminate his political competition. In the last few days, Ponta and his center-left Social Liberal Union (USL) party have sacked the speakers of both chambers of parliament, fired the ombudsman, threatened the constitutional court judges with impeachment and prohibited constitutional court from reviewing acts of parliament – all with the aim of making it easier for Ponta to remove President Traian Basescu from office. They hope to accomplish that by week’s end".</blockquote>
Well, in fact <a href="http://www.nytimes.com/2012/07/07/world/europe/romania-parliament-votes-to-impeach-traian-basescu.html">it was on Saturday</a> President Basescu's opponents finally achieve that last objective, since in a majority vote by the two chambers of the country's Parliament he was effectively impeached. He was suspended from office for 30 days, during which time a referendum on his future is to be held.<br />
<br />
As Lane Scheppele points out, it is hardly coincidental that the country has just fallen back (Spain style) into a double dip recession following a very sharp drop in output in 2009/10. Despite having received an initial 20 billion euro EU/IMF rescue loan in 2009 and a further 5 billion "top up" one in 2011 the economy still struggles to find air. The country's economy plunged by 6.6% in 2009, only to fall by another 1.6% in 2010. It then recovered slightly in 2011, before finally fall back again in the last quarter of last year - output fell by 0.2% in Q4 2011 and by a further 0.1% in Q1 2012 according to Eurostat data. Thus GDP is still below the pre crisis peak - at levels first seen towards the end of 2008 and moving backwards in time. <br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5DoG5Mo1u2-ehU1NyHddMRWo0Rs8adKCx7u8ecd-VyLQItk9gRsMSHOi88u4nvf8fxcN__H3uhhAYoL7YTEp6ZAecic8gv6zi42Vlcqpy7nudaTpmYRtQP_YcevOQdwkfvLeDLyBS3gGv/s1600/Romania+Constant+Price+GDP.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="201" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5DoG5Mo1u2-ehU1NyHddMRWo0Rs8adKCx7u8ecd-VyLQItk9gRsMSHOi88u4nvf8fxcN__H3uhhAYoL7YTEp6ZAecic8gv6zi42Vlcqpy7nudaTpmYRtQP_YcevOQdwkfvLeDLyBS3gGv/s320/Romania+Constant+Price+GDP.png" width="320" /></a></div>
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDX42I5oiapfUE0haTvx-4_XaGN4pmG_IvYVmNB2J6UFQLrkol5hSdW-GisJrV4OFTdbIbIKD251GXUUkt7SXlHMvoQr8tHE88bYz3CuvfZNix8KgRRhpH5J6h_exQ8PxACLQNMUs0xXBn/s1600/Romania+GDP+q-o-q.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="194" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDX42I5oiapfUE0haTvx-4_XaGN4pmG_IvYVmNB2J6UFQLrkol5hSdW-GisJrV4OFTdbIbIKD251GXUUkt7SXlHMvoQr8tHE88bYz3CuvfZNix8KgRRhpH5J6h_exQ8PxACLQNMUs0xXBn/s320/Romania+GDP+q-o-q.png" width="320" /></a></div>
<br />
<br />
<strong><span style="font-size: large;">IMF East Europe Programmes Under Increasing Pressure</span></strong><br />
<br />
Whom the gods would destroy they first make mad, as the saying goes. Romania, a country which urgently needed an IMF bailout just two years ago, and which is now back in recession, saw fit to decide that June would be a good time to restore public sector wage cuts introduced to restore competitiveness under their IMF programme.
<br />
<br />
The decision followed a series of anti austerity riots back in January, which lead to the demise of the then Liberal Democrat government lead by Emil Boc.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtQK-eNeLKKBLGMIhCRmSmIXR8vDe7RTspBft1-dVQFm4m20IofHjhi5hBkORD4izq0Frm9eY-v6vqu5AvkG5wr3F2HWh2gpNhiC0xnUtBe4cObP4lI5o6NfMOkRzEe7oS4HHcYV9fvjm9/s1600/2012-07-09_104326.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="103" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtQK-eNeLKKBLGMIhCRmSmIXR8vDe7RTspBft1-dVQFm4m20IofHjhi5hBkORD4izq0Frm9eY-v6vqu5AvkG5wr3F2HWh2gpNhiC0xnUtBe4cObP4lI5o6NfMOkRzEe7oS4HHcYV9fvjm9/s320/2012-07-09_104326.png" width="320" /></a></div>
<blockquote>
"The protests escalated on Jan. 14 and Jan. 15 in Bucharest, when people threw stones, torched cars and broke into stores, injuring about 60 persons, before winding down in the following days after riot police tightened security and set up checkpoints".</blockquote>
The government which replaced the Boc administration, lead by the former head of Romania's foreign intelligence services Mihai-Razvan Ungureanu, <a href="http://www.bloomberg.com/news/2012-04-26/romania-s-three-month-old-cabinet-faces-first-no-confidence-vote.html">lasted barely three months</a>.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFArJGIsG4ul40nbQbEqlLJ2qMGeFOREZ_NeuDVi0oVM4kIRgYRi7q-IEnkqAsLFG0cNaXj_VfDGWICoMRPzYNdMIDd7moXojSHVcFwNaGvbdflPgl4LngEhy4K9E5Qa5YZkwvYWZAmEr-/s1600/2012-07-09_105208.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="109" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFArJGIsG4ul40nbQbEqlLJ2qMGeFOREZ_NeuDVi0oVM4kIRgYRi7q-IEnkqAsLFG0cNaXj_VfDGWICoMRPzYNdMIDd7moXojSHVcFwNaGvbdflPgl4LngEhy4K9E5Qa5YZkwvYWZAmEr-/s320/2012-07-09_105208.png" width="320" /></a></div>
<br />
<blockquote>
"Voter support for the current coalition was cut by more than half in the past two years to about 18 percent after Boc’s government slashed public wages 25 percent and increased taxes to meet international pledges. Boc resigned on Feb. 6 after protests over austerity turned violent."</blockquote>
At the heart of the protests were the 25% public sector wage cuts introduced under the IMF austerity programme. In fact both President <a href="http://www.bloomberg.com/news/2012-03-07/romania-should-restore-public-wages-in-june-president-says-1-.html">Traian Basescu</a> and <a href="http://www.bloomberg.com/news/2012-05-03/romania-s-ponta-pledges-to-undo-wage-cuts-keep-prudent-policy.html">prime minister Victor Ponta</a> are in favour of restoring them, and <a href="http://www.bloomberg.com/news/2012-05-09/romania-agrees-with-bailout-lenders-on-increasing-budget-gap-2-.html">the IMF even agreed to a relaxation in this years deficit targets</a> to make some improvement possible, even though unrealistic increases in public salaries lay behind the countries high pre crisis inflation level, and formed part of the background which lead to the call to bring in the Fund.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEwPyIU_TW4GPT2nprUjQuHBa18lA2stGb_Z-5X15xSsplNZZE5WHIjBQ0eFjWeUl_CeZSXgCo0bXojR996ph0ZUbMlcMNBpTr827M0v7rL_tpq81Lez7jGlbk3v8v-meR5W1hUlkODTnF/s1600/2012-07-09_113713.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="121" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEwPyIU_TW4GPT2nprUjQuHBa18lA2stGb_Z-5X15xSsplNZZE5WHIjBQ0eFjWeUl_CeZSXgCo0bXojR996ph0ZUbMlcMNBpTr827M0v7rL_tpq81Lez7jGlbk3v8v-meR5W1hUlkODTnF/s320/2012-07-09_113713.png" width="320" /></a></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqN2xUOkwUnyYKGNveDKIagYnsPHyVEFlLEzMfmYPJmjRWhEqNcwhbtMu584U5zHWcMlntzG4EVHSPtSy9sHe31xMFSwvxNL4oRX_A-KhGMTf8p9YPh2vFg-zKmzrBmc7XXEyWGc8OIXPz/s1600/2012-07-09_114315.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="115" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqN2xUOkwUnyYKGNveDKIagYnsPHyVEFlLEzMfmYPJmjRWhEqNcwhbtMu584U5zHWcMlntzG4EVHSPtSy9sHe31xMFSwvxNL4oRX_A-KhGMTf8p9YPh2vFg-zKmzrBmc7XXEyWGc8OIXPz/s320/2012-07-09_114315.png" width="320" /></a></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9MGuiE8PvgO3AADG3TLppJpw_L1GtZYM0BW7GGRi18VfxjGFKx_uxLLCwVXm-rjDA7Ym0ePGHSokeJmQg2wFoHzIRgffj0dlzlGnUbsADHG71KpSSO4iE3nb4_2oh47lRiJ12RG1uOKtw/s1600/CPI+YoY.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="168" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9MGuiE8PvgO3AADG3TLppJpw_L1GtZYM0BW7GGRi18VfxjGFKx_uxLLCwVXm-rjDA7Ym0ePGHSokeJmQg2wFoHzIRgffj0dlzlGnUbsADHG71KpSSO4iE3nb4_2oh47lRiJ12RG1uOKtw/s320/CPI+YoY.png" width="320" /></a></div>
<br />
So one of the most sensitive issues in the current crisis of Romanian leadership is the question of public sector wages, and this whole question has a long history. What happened back in 2009 was not a case of long established living standards being suddenly slashed, it was a case of them being cut back to where they were before they were raised in an unsustainable way in order to win elections. As I said in my December 2008 post "<a href="http://romaniaeconomywatch.blogspot.com.es/2008/12/romanias-economy-heads-off-quietly-and.html">Romania's Economy Heads Off Quietly And With No Fanfares Into It's Deepest Crisis in a Decade</a>". (More background information about how wages and prices were accelerating out of control in the run in to the crisis <a href="http://romaniaeconomywatch.blogspot.com.es/2008/09/romania-producer-prices-accelerate.html">can be found here</a>, and <a href="http://romaniaeconomywatch.blogspot.com.es/2008/08/romania-inflation-accelerates-again-in.html">here</a>.)<br />
<blockquote>
"Perhaps the highest profile decision in the context of the recent Romanian fiscal deficit "cause celebre" was the one taken on 8 October by the Romanian Parliament, when it agreed to a pay rise for teachers which was calculated to be in the region of 50%, and this against the explicit wishes of Calin Popescu Tariceanu, the prime minister, who headed the then minority liberal government. The main worry arising from the teachers’ pay increase, aside from the concerns over how it will be funded, centres on the impact it will have on the pay demands of other public-sector workers and, in turn, of private-sector workers. If such wage pressures are not resisted, then they will obviously only weaken further an already weakened Romanian competitiveness and in all probability would drive inflation back above the 10% mark in 2009. This would be the result in normal circumstances, but the Romanian economy is not in normal circumstances right now, and it is highly unlikely that the present credit crunch and the pressure from the international financial markets will leave time for this inflation spiral to run its course. Much more urgent matters are likely to make their presence felt first".</blockquote>
But the problem is only partly that undoing these wage reductions is a highly questionable measure - Romania, like so many other periphery countries, is, after all, supposedly going through an "internal devaluation" process - the other part of the equation is that the austerity measures - as we are seeing elsewhere in Eastern Europe - just aren't working in the sense of restoring stable, sustainable growth, and we aren't getting an adequate analysis of why this might be. Exports are falling back as the Euro Crisis deepens, and raising wages is seen as a way to unerpin growth in difficult times. But is the Romanian economy really competitive enough, is the export sector large enough, and is it not overly dependent on demand from a European Union which isn't going to enter a positive momentum dynamic anytime soon? Instead of applying what is evidently a populist measure wouldn't the money be better spent on putting these issues straight for the longer term.<br />
<br />
<strong><span style="font-size: large;">Extreme Example Of A General Problem?</span></strong><br />
<br />
At the end of the day Romania is not <strong>that</strong> different from many other countries in the region, and the political problems we are seeing there could easily arise elsewhere, if perhaps in a more restrained form. Following the bursting of a forex credit driven boom in 2009, domestic demand is now notably underperforming.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgro1s-ztfMb-mh_fGJweCsL_Kjsh-80h3s8Dq2B7iakedTJniCQgzMOPza_LGiALbQL3Dbf2a79qSBEnrpbVmCAYJTRjV-ycNJ5mubEfkpcyn56UlP_rj6FlQI4orCnjSITRyiK0KW1ZpF/s1600/retail+sales+index.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="170" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgro1s-ztfMb-mh_fGJweCsL_Kjsh-80h3s8Dq2B7iakedTJniCQgzMOPza_LGiALbQL3Dbf2a79qSBEnrpbVmCAYJTRjV-ycNJ5mubEfkpcyn56UlP_rj6FlQI4orCnjSITRyiK0KW1ZpF/s320/retail+sales+index.png" width="320" /></a></div>
<br />
Construction has fallen into a slump.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJm_SRvAaUoxumPeoRH38zXx5M2lcfbP2kxqKmV6lEEq9f43tugRf8KNxpfu6mIjaa6OTxMR6N8UQuduTIaEXrgiyy4cmbxFBLGbOaVsLuJHaAJ2RKFznYopcMSF2SBRtD-tc-RR1Pz74k/s1600/construction+index.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="193" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJm_SRvAaUoxumPeoRH38zXx5M2lcfbP2kxqKmV6lEEq9f43tugRf8KNxpfu6mIjaa6OTxMR6N8UQuduTIaEXrgiyy4cmbxFBLGbOaVsLuJHaAJ2RKFznYopcMSF2SBRtD-tc-RR1Pz74k/s320/construction+index.png" width="320" /></a></div>
<br />
Unemployment, while not <strong>that</strong> high in comparison with the Baltics or Spain/Greece, has been rising. And with the rising unemployment has come a surge in non performing bank loans - they reached 15.9% of the total in March, a number which may be even higher if the IMF's warnings about the need for vigilance over loan "evergreening" are anything to go by.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvuEsxHDllzF8JwFuVFAXrYOXYgkslZkZ4czaBbzf10jOYdGI-zsEyJBXSCEox8CxTmUEWD2zG2Q1uhyB_ww9jZLl5ZtAcKjzYtWz_vj5zQ7dUYF-F1ebC3gHRWlgJywscXKamO3ffnr1S/s1600/unemployment.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="189" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvuEsxHDllzF8JwFuVFAXrYOXYgkslZkZ4czaBbzf10jOYdGI-zsEyJBXSCEox8CxTmUEWD2zG2Q1uhyB_ww9jZLl5ZtAcKjzYtWz_vj5zQ7dUYF-F1ebC3gHRWlgJywscXKamO3ffnr1S/s320/unemployment.png" width="320" /></a></div>
<br />
And the flow of credit, while hard to quantify, has all but seized up.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS8IdJJHN4O9hRBUjnq_tM2yaGQ5RBh5LI_ztXLbCz3QzaCfmFvBllweN3qP7bcaxDEgjj-OJhyphenhyphen-kp-eLKIVDTZDs6u91QznJm58H8sY2ktar-hkcCTnIufZZ2uUi_UgLa6tLSH90y9KMK/s1600/Romania+Total+Ron+Household+Credit.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="187" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS8IdJJHN4O9hRBUjnq_tM2yaGQ5RBh5LI_ztXLbCz3QzaCfmFvBllweN3qP7bcaxDEgjj-OJhyphenhyphen-kp-eLKIVDTZDs6u91QznJm58H8sY2ktar-hkcCTnIufZZ2uUi_UgLa6tLSH90y9KMK/s320/Romania+Total+Ron+Household+Credit.png" width="320" /></a></div>
<br />
The reason the availability of credit is hard to measure is that some 60% of total private sector borrowing is forex denominated, which means that as the value of Leu falls the total stock of debt rises, distorting any attempt to measure new credit (the above chart is for local currency denominated household loans only, but it gives a clear impression of the state of affairs). This issue misleads some observers - IMF analysts included - into concluding that credit is flowing again. The IMF state in their latest report that during the first quarter "lending to the nonfinancial corporate sector increased 8.1 percent, while household credit grew only 2.1 percent", but much of this apparent increase is surely due to the upward revaluation effect, especially as <a href="http://www.bloomberg.com/news/2012-04-27/romanian-leu-weakens-the-most-in-six-weeks-as-government-falls.html">the leu fell sharply</a> in the aftermath of February's disturbances. <br />
<br />
<span style="font-size: large;"><strong>Internationally Competitive?</strong></span><br />
<br />
Despite the fact that exports have done comparatively well since the onset of the global financial crisis, the country still runs a goods trade deficit as well as a current account one, even if both of these have improved since 2009. They have notably gotten better, and then gotten stuck.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7ypzuUoMvHpyNwS-BAfB7fa8r5ewSlAiyARcexnWqI4qPb_41ikKvLe8v6-nf9ognYU6ERA6ZvF0-33AA0K1EY47P8nDT_lFz9BuYKzy_cmEHkJF97y1TsiWhGzDtRdvPoEgYkM-NN_dx/s1600/Romania+Constant+Price+Exports.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="194" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7ypzuUoMvHpyNwS-BAfB7fa8r5ewSlAiyARcexnWqI4qPb_41ikKvLe8v6-nf9ognYU6ERA6ZvF0-33AA0K1EY47P8nDT_lFz9BuYKzy_cmEHkJF97y1TsiWhGzDtRdvPoEgYkM-NN_dx/s320/Romania+Constant+Price+Exports.png" width="320" /></a></div>
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDssiKMxYB8BcklDNGOjAOdOOeYByQEVOcqXr5XhzGxPz5QJZdEVP5qbHbaGPcOsQtlBaR92yYPV9kuKi83xK7qJOzqL8z02ZMfL7N60dNvvXHfpdua-N4_Viva2jKtreVAsl-udZwaxn5/s1600/Romania+Goods+Trade+Balance.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="182" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDssiKMxYB8BcklDNGOjAOdOOeYByQEVOcqXr5XhzGxPz5QJZdEVP5qbHbaGPcOsQtlBaR92yYPV9kuKi83xK7qJOzqL8z02ZMfL7N60dNvvXHfpdua-N4_Viva2jKtreVAsl-udZwaxn5/s320/Romania+Goods+Trade+Balance.png" width="320" /></a></div>
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhK3hOJq9roY6kCkE6MFauIFYfKxv3Q8auPXwudk6rX8phuXGB01fUAXL2YOwvcDuhoYlY1xEeKXAj-9MzcMS49KN4GDogvohyJ_hTGJxFsEfrYCSHdxbaO84q2TJJHSPTeqIO_mzLcYC3I/s1600/Romania+Current+Account+Deficit.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="190" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhK3hOJq9roY6kCkE6MFauIFYfKxv3Q8auPXwudk6rX8phuXGB01fUAXL2YOwvcDuhoYlY1xEeKXAj-9MzcMS49KN4GDogvohyJ_hTGJxFsEfrYCSHdxbaO84q2TJJHSPTeqIO_mzLcYC3I/s320/Romania+Current+Account+Deficit.png" width="320" /></a></div>
<br />
The initial surge in exports post the great recession was impressive, even if as in so many other countries it has petered out as 2012 has progressed and the uro crisis deepened. Exports year on year are now down over the comparable month in 2011.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl4ysW6v0BBo8uQkE4taHr7fdD_WWVXcaSMYnKrNp1ETRt4ATQlkLof6UE7hW5Wx-aDklvwuVlwv1hNUBWYaVHO1ZF-ERZCEjydkXrJtaTI2g1M4OSf9ucRjeBvw2VRCWwq2PelCs2MGyS/s1600/Romania+exports+y-o-y.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="171" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl4ysW6v0BBo8uQkE4taHr7fdD_WWVXcaSMYnKrNp1ETRt4ATQlkLof6UE7hW5Wx-aDklvwuVlwv1hNUBWYaVHO1ZF-ERZCEjydkXrJtaTI2g1M4OSf9ucRjeBvw2VRCWwq2PelCs2MGyS/s320/Romania+exports+y-o-y.png" width="320" /></a></div>
<br />
Romania was awarded <a href="http://www.bloomberg.com/news/2011-02-06/romania-to-secure-new-5-billion-euro-accord-from-the-imf-eu.html">a second EU/IMF loan of 5 billion Euros in February 2011</a>, due to the country's exposure to the European sovereign debt crisis. <br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMqaPfBmYTLVfhwI74qq_McWdQZyKFv5m0htwnxIet9dfedKAUbmP-CgVvgJFfStu3937u5DhQRNsWKH7nyOEHJgqJ7PjLG9-zlXb8bYoclikjo09GKzOSIzxEvq_UFnZa8bIeLOo7eDLh/s1600/2012-07-09_143631.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="207" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMqaPfBmYTLVfhwI74qq_McWdQZyKFv5m0htwnxIet9dfedKAUbmP-CgVvgJFfStu3937u5DhQRNsWKH7nyOEHJgqJ7PjLG9-zlXb8bYoclikjo09GKzOSIzxEvq_UFnZa8bIeLOo7eDLh/s320/2012-07-09_143631.png" width="320" /></a></div>
<br />
The exposure passes through three channels, dependence on European markets where demand is falling for exports, the <a href="http://in.reuters.com/article/2012/06/22/imf-romania-idINL2E8HMA6720120622">domestic banking sector depends heavily on credit from West European parent banks</a> which are themselves affected by the crisis in their own countries, and thirdly the fact that the country is perceived by investors as one of the weak links in the Eastern chain, implying it is very exposed to contagion risk. In particular, with more than 80 percent of the Romanian banking system controlled by foreign banks (including a number of Greek-owned banks which account for around 14 percent of total bank assets), Romania is particularly vulnerable to spillovers from banking issues elsewhere in Europe.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglCk3R1dF3W9km5wdHbCzO9-oppQ3nN5fGBm9CUi6IzPyzsYQsjH-9qdVHf6cZ8xlf-nKbID4O9MOnsL3QOxcTVztf5GYMM_gmRqljrJ-8duXYxOl9iaD6E5_g7D9e9KrsSUomuR2NsIL6/s1600/2012-07-09_161922.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="152" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglCk3R1dF3W9km5wdHbCzO9-oppQ3nN5fGBm9CUi6IzPyzsYQsjH-9qdVHf6cZ8xlf-nKbID4O9MOnsL3QOxcTVztf5GYMM_gmRqljrJ-8duXYxOl9iaD6E5_g7D9e9KrsSUomuR2NsIL6/s320/2012-07-09_161922.png" width="320" /></a></div>
<br />
<br />
<strong><span style="font-size: large;">But In Some Ways Romania's Problems Are Not Typical</span></strong><br />
<br />
Like so many of the country's in the region (the Baltics, Bulgaria, Hungary, Serbia, Ukraine, etc), Romania's population of around 21.5 million is now steadily falling.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT9oMtHCJ4JNtUagRvHExBxtj6Juuc8Xe7Qjn3uv0iOI4-agMIvFUrMo2_ipgkylyBVrNP4_tMqD0g1P6i9H4IP0Zfv_PtkjAguUWGxjqsi5MkI1AkJ9qPPXSFUr1LUTvTn349-5CuAJSI/s1600/Romania+Population.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="169" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT9oMtHCJ4JNtUagRvHExBxtj6Juuc8Xe7Qjn3uv0iOI4-agMIvFUrMo2_ipgkylyBVrNP4_tMqD0g1P6i9H4IP0Zfv_PtkjAguUWGxjqsi5MkI1AkJ9qPPXSFUr1LUTvTn349-5CuAJSI/s320/Romania+Population.png" width="320" /></a></div>
<br />
And like the Baltics, many Romanians now work outside the country. But unlike the Baltics, where demographers like Mihail Hazans <a href="http://www.slideshare.net/Edwardhugh/latvias-demographic-future">have carried out systematic research to try to determine the extent of the problem</a> (research which has even helped the Latvian government formulate policy), no such care has been taken in the Romanian case. Indeed, a search for information on Romanian migration on Eurostat reveals an empty data field.<br />
<br />
Yet large numbers of Romanians now live and work outside their country. According to the <a href="http://www.insse.ro/cms/files/statistici/comunicate/com_anuale/ocup-somaj/somaj_2011e.pdf">Romanian statistics office</a>, the Romanian labour force in 2011 totalled 9.9 million people, of whom 9.1 million were employed. At the same time, as of 1st January 2012 there were 896,000 Romanians registered as residents in Spain.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWAbxwt-LIbFFY_TnzPBJxT742kxHvnRE82bD6GJbqdCREG4B8W45YxMa0NGpC3a4ZpKtaFUwcpCMBwEEGlgAuV4TPPXV-6i5gUFc_ztnfZHP5dA7edDK1YbJSlbF1diz_qQ4RyLGefZNv/s1600/Romanian+Residents+In+Spain.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="174" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWAbxwt-LIbFFY_TnzPBJxT742kxHvnRE82bD6GJbqdCREG4B8W45YxMa0NGpC3a4ZpKtaFUwcpCMBwEEGlgAuV4TPPXV-6i5gUFc_ztnfZHP5dA7edDK1YbJSlbF1diz_qQ4RyLGefZNv/s320/Romanian+Residents+In+Spain.png" width="320" /></a></div>
<br />
And on 1st January 2011 there were 969,000 Romanians registered as resident in Italy. <br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig7zd0Bi5iRsYzABNbi2ej3yCIJbvx9QTfxnF4q2qaDm8siwb2_YYKKKKHSE78_OH7KmsXcqasy88A7TkxqC5i_CHhAhOwTh-ipg_6frBPXbQKZWIhGNq2JMA5dkkjFAX0PYLZPSulo5I8/s1600/Romanians+in+Italy.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="189" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig7zd0Bi5iRsYzABNbi2ej3yCIJbvx9QTfxnF4q2qaDm8siwb2_YYKKKKHSE78_OH7KmsXcqasy88A7TkxqC5i_CHhAhOwTh-ipg_6frBPXbQKZWIhGNq2JMA5dkkjFAX0PYLZPSulo5I8/s320/Romanians+in+Italy.png" width="320" /></a></div>
<br />
So it is safe to say that - given some Romanians must be in countries other than Spain and Italy - the total number of Romanians living and working outside their country must be more than 2 million. So the population numbers must be significantly overstated, as must the size of the labour force. The Latvian statistics office are in the process of revising their data (see table below, especially the revisions for 2011, which have yet to be interpolated into the earlier data, the correction is large and significant, click on graphic if you can't read), and it is incredible that neither the EU nor the IMF are enforcing a similar procedure on other countries in the region, and in particular Bulgaria and possibly Poland (in an EU context).<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5BBPhVO7xw7_TmucGdQd_OdaI7nxFUzMa_qnvvv9ohsM9y77-NJLOuVudzUZT7a1qFHL7Hx5TEzGX4hyphenhyphenwmsZi4Ak6NN9s9qHHr1gGUlEzOIFVYZZR0mShkMROzJ9ehBdVDHH4v5Rw8V1y/s1600/Latvia+Population+Data.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="201" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5BBPhVO7xw7_TmucGdQd_OdaI7nxFUzMa_qnvvv9ohsM9y77-NJLOuVudzUZT7a1qFHL7Hx5TEzGX4hyphenhyphenwmsZi4Ak6NN9s9qHHr1gGUlEzOIFVYZZR0mShkMROzJ9ehBdVDHH4v5Rw8V1y/s320/Latvia+Population+Data.png" width="320" /></a></div>
<br />
The real issue is that a growth model which involves a country with long term below replacement fertility living in part from remitances raised via population export is not sustainable, and someone in a responsible position somewhere should be warning on this.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0KwQDAxnJ_3NRiY2ZFc1Z5rvrOTt48uy2K5Z2jPXgk_LYNMji2afhuNo8hmefWHb-i1X91IwN59Ynj1QYEz_bQsmthu6H4o4a22ye6M530ECzTX-KqtnA23LaA0vvaI-ztuji8j24SsEq/s1600/Romania+TFR.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="167" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0KwQDAxnJ_3NRiY2ZFc1Z5rvrOTt48uy2K5Z2jPXgk_LYNMji2afhuNo8hmefWHb-i1X91IwN59Ynj1QYEz_bQsmthu6H4o4a22ye6M530ECzTX-KqtnA23LaA0vvaI-ztuji8j24SsEq/s320/Romania+TFR.png" width="320" /></a></div>
<br />
<br /><strong><span style="font-size: large;">Between A Rock And A Hard Place</span></strong><br />
<br />
Naturally, opinions vary about the degree of success of the IMF programme. Andy Macdowall, <a href="http://blogs.ft.com/beyond-brics/2012/06/26/romania-imf-remedy-starts-to-pay-off/#axzz207zvOQo2">writing on the FT Beyond Brics blog</a> is prepared to give the fund a qualified thumbs up - "While eurozone policy makers thrash out the growth vs austerity debate, the evidence from Romania seems to be that the traditional medicine works."<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaJGUFAJXYa6AWXbuUn5aVAQm8QJNF1_ml9U21h5s0q9Fr4pWI2WvVpnZMg7AB6YF0qnjSyRSjd5qOtgkNQwrfKqcA7SCf8AhKwhMDzHqA0sl9V8RUcEN7pz-N66lKGkQeSzF-M7ky3iRy/s1600/2012-07-09_153829.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="157" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaJGUFAJXYa6AWXbuUn5aVAQm8QJNF1_ml9U21h5s0q9Fr4pWI2WvVpnZMg7AB6YF0qnjSyRSjd5qOtgkNQwrfKqcA7SCf8AhKwhMDzHqA0sl9V8RUcEN7pz-N66lKGkQeSzF-M7ky3iRy/s320/2012-07-09_153829.png" width="320" /></a></div>
<br />
And many may say, well Romania is a poor country so aren't you being a bit harsh on these public sector wages issues Edward? Possibly. But for anyone following the whole evolution of the Romanian inflation/wage rises dynamic over the last decade, alarm bells should be now ringing. <br />
<br />
Romania's problem is one of growth, and how to get it. With the country in a severe credit squeeze, and domestic demand so weakened by the population exit, the only way to sustainable growth, as in so many other cases, is through exports, and in particular through exports beyond the frontiers of the EU. Artificially boosting demand by paying government employees more won't solve that problem, and arguably it will make it far worse. <br />
<br />
The easiest way to raise exports would be to devalue, but in Romania's case this is hard, due to the high level of exposure to forex loans. In fact the IMF try to argue that such devaluation is not necessary. "The exchange rate remains in line with fundamentals and Romanian exports remain competitive.", they say. In fact we see this argument in one country after another. The issue is not that existing exports are not competitive, but that the country as a whole is not sufficiently internationally competitive to produce a large enough export sector to support growth. The Fund still expect private demand to do the work: "Private demand, buoyed by solid credit growth, is expected to rebound and contribute to growth along with stronger absorption of EU funds. Growth should accelerate to around 3 percent in 2013 and average 3½-4 percent through 2016". <br />
<br />I think they just haven't grasped yet the importance of the demographic components in a CEE context. These growth numbers are way too high, and internal demand (with all those middle age range people gone "missing") just isn't going to become a driver again. Higher wages in the public sector isn't going to solve this problem.<br />
<br />Really I think the problem with the Fund's current approach is that they have locked themselves into an ideological corner (austerity, privatisations and structural reforms) and just are not open to listening to "out of the box" perspectives. Given the complexity of the problems we face this is a very dangerous way of doing things.
<br />
<br />Of course, not everything about Romania is problematic - compared to Western Europe, for example, the fiscal deficit problems have been comparatively smaller - which makes it strange that so much of the Fund's attention has been focused on fiscal issues rather than the broader macro economic structural problems . But, then agan, we are talking about emerging, and not developed markets here, so a deficit of 6.5% of GDP last year is not to be sneezed at.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhA5EH9nNycOzAp90nrG138PGYzHQRZtlz01cA4IO5ftYdOOEP8_0UnpdO3Syfd4ugeiM0KiMGgtW2q8oQ-ay8FDcbg6O2osXz3SAyuyXuXemBMFXdqXbOjiIqT9E_gMpTq7Ir5r5u9JST3/s1600/Romania+Fiscal+balance.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="181" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhA5EH9nNycOzAp90nrG138PGYzHQRZtlz01cA4IO5ftYdOOEP8_0UnpdO3Syfd4ugeiM0KiMGgtW2q8oQ-ay8FDcbg6O2osXz3SAyuyXuXemBMFXdqXbOjiIqT9E_gMpTq7Ir5r5u9JST3/s320/Romania+Fiscal+balance.png" width="320" /></a></div>
<br />
And last year gross government debt was only around 32% of GDP, although it has been rising rapidly.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4AxWcdlwueMDccdaCDVukIFHWmOsW-MkMAfx43QGej4lGyX2SDU_Kh5jQH-LsorEEPZPgNutxOnRk0dhxKeQI460TCVtfjVmTLbwDj9VGzYxSfsimyq_hqfSvueyhBruLpquUnA5RLuB5/s1600/Romania+Gross+Government+Debt.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="179" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4AxWcdlwueMDccdaCDVukIFHWmOsW-MkMAfx43QGej4lGyX2SDU_Kh5jQH-LsorEEPZPgNutxOnRk0dhxKeQI460TCVtfjVmTLbwDj9VGzYxSfsimyq_hqfSvueyhBruLpquUnA5RLuB5/s320/Romania+Gross+Government+Debt.png" width="320" /></a></div>
<br />
The thing is the structural problems need to be addressed, and the economy needs to be put back on a sustainable path, and this just isn't happening at present. If government money is to be spent it would be far more worthwhile to use funds finding a solution to the Forex loans problem (as to some extent they have done in Hungary) rather than offering stimulus to an economy that won't be stimulated in its present condition.<br />
<br />
While government debt is low, external debt isn't, and is was just over of 72% of GDP at the end of 2011. If the country continues to run a current account deficit and experience weak growth this debt looks set to grow - and especially if the leu maintains its trend of <a href="http://online.wsj.com/article/BT-CO-20120706-704181.html">hitting ever lower levels against the Euro</a>. As a rapidly ageing society Romania, like all CEE societies needs to reduce its external indebtedness and built up its savings base for the future.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilMrcOo3arrrXg2FzdBMy9_siU6KOr7igmO-P_1c01aZ0BvzdDpPiCDZQPOaf8CAH8sFa3LFztHOiKtywb-PvbKoPCg-KaSEmTdrXBtSC_OIRDM2fAFL67lE4HkT9kmGbeHvGn3Fey1vyr/s1600/Romania+Net+IIP.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="172" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilMrcOo3arrrXg2FzdBMy9_siU6KOr7igmO-P_1c01aZ0BvzdDpPiCDZQPOaf8CAH8sFa3LFztHOiKtywb-PvbKoPCg-KaSEmTdrXBtSC_OIRDM2fAFL67lE4HkT9kmGbeHvGn3Fey1vyr/s320/Romania+Net+IIP.png" width="320" /></a></div>
<br />
So resources should be consumed resolving this external debt problem, and making the country less sensitive to movements in the exchange rate. That way the central bank could once more have access to independent monetary policy. The current monetary policy rate is 5.25%, for a country having a double dip recession after a very sharp fall, that is quite incredible, and compares with the 0.5% benchmark rate now offered by the central bank in the Czech Republic, where the cheap forex loans trap wasn't fallen into to anything like the same extent.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLXuW1WXaxwJy4Rfs7-gUrDtyCAXBdpQQDqrf34G4v3vrrVVPP1JTfAOQoAL6grtPqevEW90ehzxhJjFmlxTWk-WvQdlsEK5Uae7QcEtCnNAi19Zlt6tC_UYALMwq6Ilai3zYfWqbwpigz/s1600/interest+rates.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLXuW1WXaxwJy4Rfs7-gUrDtyCAXBdpQQDqrf34G4v3vrrVVPP1JTfAOQoAL6grtPqevEW90ehzxhJjFmlxTWk-WvQdlsEK5Uae7QcEtCnNAi19Zlt6tC_UYALMwq6Ilai3zYfWqbwpigz/s320/interest+rates.png" width="320" /></a></div>
<br />
In addition serious efforts need to be made to stop the negative migration drift. If this doesn't happen neither the country nor its economy will ever be stable and sustainable. The IMF praises the fact that the country has met its programme targets despite the evident deep structural deficiencies the economy faces. In <a href="http://www.imf.org/external/pubs/ft/scr/2012/cr12157.pdf">the latest programme review</a> they even state that “Romania’s overall track record under the programme continues to be strong.” I almost choked when I read that bit, but maybe it is a typo, and they are talking anout another country, since it is hard to see how the observation applies to Romania. There is a lot of talk about structural reforms in the energy and transport sectors, but from a macro point of view what is going on there looks more like a total mess to me. Perhaps they should take a second look at the programme, maybe there was something less than adequate about the objectives and targets which were set in the first place. Curiously, while the report mentions the fact that "weather related disruptions weakened performance in the first quarter", I couldn't find a reference to the fact that the country is back in recession - rather than experiencing fragile growth - in the entire document.<br />
<br />
<strong><span style="font-size: large;">Stop The Slide To The Edge!</span></strong><br />
<br />
Recent events make clear that in addition to all its economic woes Romania is now increasingly facing the added issue that the politics of austerity are crumbling. This phenomenon has already been seen in Hungary, and to some extent in Ukraine. Short term risks to Romania’s economy have risen substantially due to the ongoing euro area financial crisis which is being transmitted to the country via credit stress in the financial sector, reduced export growth, and more difficult sovereign debt financing. In the longer run the outlook is bleak, as the country’s population is steadily falling – over 15% of the country’s workforce now live and work abroad – and finding ways to support the continually ageing population is becoming a real challenge.
<br />
<br />
Romania’s GDP contracted during 6 of the 8 quarters between Q3 2008 and Q3 2010, with a total fall peak to trough of 8.7%. Despite a timid recovery since (boosted largely by exports and agriculture) the economy was still 5% below its pre-crisis peak at the end of last December.
What little growth there is comes entirely from exports, as domestic demand continues a slow decline. Romania has enjoyed substantial export growth since the crisis, but still runs a goods trade and current account deficit, making the country continually dependent on external financing.
<br />
<br />This connection between political instability and IMF programmes in the East is becoming habitual. We have seen it in Ukraine, and we have seen it in Hungary. There is obviously something deeply wrong with the way these programmes are designed, since none of them (including Latvia) could be claimed to have achieved the objective of returning the country to robust and stable long term growth. We can only hope that what we have seen in the East will not now spread to the South, though I can't say I am especially convinced it won't.
<br />
<br />
This post first appeared on my Roubini Global Economonitor Blog "<a href="http://www.economonitor.com/blog/author/ehugh3/">Don't Shoot The Messenger</a>".Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-71204610432111397252011-08-22T09:31:00.000-07:002011-08-22T09:32:08.654-07:00Eastern European Growth - Coming Rapidly Off The Boil?The latest round of EU GDP data, brought to light a reality which many who have been closely following the economies of Eastern Europe already suspected: that the heavily export dependent economies in the region would almost inevitably be dragged down by the rapid slowdown in Europe's principal economic motor, the German economy (<a href="http://www.economonitor.com/edwardhugh/2011/08/04/could-there-really-be-a-recession-risk-in-germany/">see this post</a> for background).<a name='more'></a>
<br />
<br />The Czech Republic, Hungary, Slovakia, Bulgaria and Romania all reported slower GDP growth in the second quarter, due in large measure to the disappointing performance of their German neighbour, central Europe’s most important trading partner.
<br />
<br />As <a href="http://www.economonitor.com/edwardhugh/2011/07/27/a-hungarian-waltz-on-the-wild-side/">anticipated on this earlier blog</a>, the Hungarian results were especially weak. Analysts had widely predicted interannual growth of just under 2.5%, but in the end the result came in at 1.5%. Even worse, the economy completely failed to grow in the second three months in the year, since quarter on quarter growth was effectively zero. Thus the increase in industrial activity which accompanied the increased demand for exports was only sufficient to compensate for the drop in internal demand, and this at a time of near record export levels in many European countries. This is doubly worrying since the government, while continuing to reduce the deficit, has appropriated something like 9% of GDP from a one off pension move, paying down debt and, in addition, adding some support to this years spending programme. This factor will not be there to assist growth in the years to come.
<br />
<br />This post will examine the growth performance in a number of the region's economies, and attempt to extract some useful conclusions for what we can expect to see in the region in the future.
<br />
<br /><strong>The Czech Republic Shows Its Weaknesses</strong>
<br />
<br />
<br />Mirroring what just happened in Germany, second quarter GDP growth in the Czech republic slowed from what had been the fastest pace in almost three years achieved in the first three months of the year, to a mere 0.2%, the slowest rate of increase in two years.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgujOoZ9t7XWfwbqi2fvQHA6o3Mfe1xxGev2Hn9Bsv-vsTZ_3BduF1qUMh1A01zXAT35Xf5mEfw1yuOqRH_t8o4WkXuUf4ZcTiXz35PLHDiiKOqho4V8jlh1KYPqJBZAYt7kGR8axIk_oY/s1600/gdp+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgujOoZ9t7XWfwbqi2fvQHA6o3Mfe1xxGev2Hn9Bsv-vsTZ_3BduF1qUMh1A01zXAT35Xf5mEfw1yuOqRH_t8o4WkXuUf4ZcTiXz35PLHDiiKOqho4V8jlh1KYPqJBZAYt7kGR8axIk_oY/s400/gdp+two.png" /></a>
<br />While the economy grew 2.4 per cent from a year earlier, compared to 2.8 per cent in the first three months of the year.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb-TklxusX3d2lqZ9_vjt49Dfvj02eAQ7AQp1FkmxEPkG2Xoz8gAuLKBN11qdhFFc_tU4-iQXeyW8IV79OWkmytE_6EVaT-_FNHv9CibHp_wK5jzJQ9zcewzUBg_6eI3ETA7ChOAszTSs/s1600/gdp.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb-TklxusX3d2lqZ9_vjt49Dfvj02eAQ7AQp1FkmxEPkG2Xoz8gAuLKBN11qdhFFc_tU4-iQXeyW8IV79OWkmytE_6EVaT-_FNHv9CibHp_wK5jzJQ9zcewzUBg_6eI3ETA7ChOAszTSs/s400/gdp.png" /></a>
<br />
<br />Like many economies in the region, the Czech one is now strongly dependent on foreign demand for its products. Exports have surged back up and beyond pre-crisis highs, while industrial output has grown strongly.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrPevwwu_PItfNBwmVJH9iZdnHMWFktkJlH31wKY0V3Ln-i0orZkaCjk-o2m4-fmjxSw2PEDayud1DeoUQHM0_40WsFr5BbpdZIr9F-TMl0PMuhPiCaR4ClTYyVQW1pvHxg-hrU29mx6c/s1600/Czech+exports.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrPevwwu_PItfNBwmVJH9iZdnHMWFktkJlH31wKY0V3Ln-i0orZkaCjk-o2m4-fmjxSw2PEDayud1DeoUQHM0_40WsFr5BbpdZIr9F-TMl0PMuhPiCaR4ClTYyVQW1pvHxg-hrU29mx6c/s400/Czech+exports.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmQQy9vEdw09sfaXKsMQ97J1Wo0zo0n9mpxC9F0XmqCXvav0NankKtVWEy8prbFvHv0HAqTyx-3bcC3JU7C4-4F7JgNtVu3qVuwOOWTvX0CjpGhXx3PM-pF1cIgbYMZaaRKWP2m0W6xLs/s1600/Czech+IP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmQQy9vEdw09sfaXKsMQ97J1Wo0zo0n9mpxC9F0XmqCXvav0NankKtVWEy8prbFvHv0HAqTyx-3bcC3JU7C4-4F7JgNtVu3qVuwOOWTvX0CjpGhXx3PM-pF1cIgbYMZaaRKWP2m0W6xLs/s400/Czech+IP.png" /></a>
<br />What makes the Czech case interesting is that neither the private nor the public sector is heavily indebted - public sector debt was only 41.3% of GDP in 2010, and the country's external debt was only 46.7% of GDP. Nor is the country facing an "investor strike", the central bank policy rate is currently 0.75% , and far from this deterring people from holding the currency, the Koruna has gained nearly 2.4% against the euro so far this year, as compared with a decline of around 10 per cent in the Polish zloty. Indeed some are even talking of the Koruna <a href="http://blogs.ft.com/beyond-brics/2011/08/18/the-czech-koruna-a-new-star-in-the-foreign-exchange-sky/#axzz1VgLKIOQ7">as a potential safe haven alternative to the Swiss Franc</a>.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2yGFeroSYCXYoxg2WY0_GXHo1mvxQ2QZkQVbsztnHkl26-VaXd37dGWjKBEwvkMGx7j7tMPr4SM6aqH_nCvqgqzfXOgthZQTsY5I0ygc8yWMyhOZDCPXXOYibc5vKkAOEZgSZsDSuE78/s1600/cZech+Interest+rates.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2yGFeroSYCXYoxg2WY0_GXHo1mvxQ2QZkQVbsztnHkl26-VaXd37dGWjKBEwvkMGx7j7tMPr4SM6aqH_nCvqgqzfXOgthZQTsY5I0ygc8yWMyhOZDCPXXOYibc5vKkAOEZgSZsDSuE78/s400/cZech+Interest+rates.png" /></a>
<br />
<br />The government deficit has been over the EU 3% limit (it stood at 5% of GDP in 2010) and recent government austerity measures to reduce this level have undoubtedly played some part in the slowdown, but this on its own is not enough to fully explain the velocity of the reduction. As I argue <a href="http://www.economonitor.com/edwardhugh/2011/08/04/could-there-really-be-a-recession-risk-in-germany/">in my most recent post on Germany</a>, export driven economies are inherently volatile, and what has happened in the Czech Republic is an almost classic example. But why is the country export dependent? Well, there are probably as many answers offered to this question as there are economists, but my own personal view is that demography is the key. After decades of very low fertility, the country's population is ageing rapidly, and by 2020 the median age will be nearly 45, making the Czech Republic the second oldest nation in the region, after Slovenia.
<br />
<br />Many will see no significance in this fact, but from where I am sitting the association is not simply coincidental (see <a href="http://mpra.ub.uni-muenchen.de/17655/1/MPRA_paper_17655.pdf">this working paper from Claus Vistesen</a>).
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3jg0cHVE8mHd5Vb2Bvmu1X4caqkqT-lrsVSo0uMpRNJ14g9CUvQVL4-HXifnIYjJTJkuQzOktZZsqP65q4WWSIFWMdCJCZkqZTULz39WAVqYdXRURhjpPsiCTNrmHXYCn0YI2K7_TFmw/s1600/Cxech+median+age.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3jg0cHVE8mHd5Vb2Bvmu1X4caqkqT-lrsVSo0uMpRNJ14g9CUvQVL4-HXifnIYjJTJkuQzOktZZsqP65q4WWSIFWMdCJCZkqZTULz39WAVqYdXRURhjpPsiCTNrmHXYCn0YI2K7_TFmw/s400/Cxech+median+age.png" /></a>
<br />
<br />A number of "<strong>stylised facts</strong>" can be extracted from the Czech example. <strong>In the first place,</strong> if we look back at the q-o-q GDP chart (the orange/red one), what is most noteworthy is how the rate of quaterly growth since the crisis has fallen to about half its prior level. This, in an economy without major debt problems and with a fairly competitive economy must give us some idea of <strong>what the "new normal" looks like</strong>. GDP growth is much lower, and likely to remain lower (on average) as far ahead as the eye can see.
<br />
<br />In the second place, <strong>construction output is down</strong> (and falling). This also seems to form part of the brave new world we now live in, at least as far as most of Europe, the US and Japan are concerned. A house is once more becoming something you live in.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmID15O35RH2JbDWI0hG5w5L5Qh5Dhzwu0uX6DJwkL1mPtWNtiZ3uiHAkXitfGuFtWAihlF2jKcDwhVs4_Qlt5MbUb0FLwxzXscxWtEnN5ss1aQ5xqqHdGYvZ6I5we0mw-oHpk3kSuwbM/s1600/Czech+construction.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmID15O35RH2JbDWI0hG5w5L5Qh5Dhzwu0uX6DJwkL1mPtWNtiZ3uiHAkXitfGuFtWAihlF2jKcDwhVs4_Qlt5MbUb0FLwxzXscxWtEnN5ss1aQ5xqqHdGYvZ6I5we0mw-oHpk3kSuwbM/s400/Czech+construction.png" /></a> And thirdly, as I say, <strong>domestic demand is falling steadily</strong>, as reflected in retail sales (naturally in the more heavily indebted economies this situation is worse). This weakness in domestic demand is unlikely to be temporary, and those waiting for a turnaround would do better going and waiting for Godot.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLl7eE384ATweB10FNFVmddJOKRn9_z64V-u4YKyrAc1F4yxkClwIO8eUAf0-zuvl6cv67gITsuJ1ft1l6HHx3Mnyfc0WTku4Kb8OU-XMtA_7GgzauVtyNIsdKFhQ40ua9J96-Lh4rdMU/s1600/Czech+Retail+Sales.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLl7eE384ATweB10FNFVmddJOKRn9_z64V-u4YKyrAc1F4yxkClwIO8eUAf0-zuvl6cv67gITsuJ1ft1l6HHx3Mnyfc0WTku4Kb8OU-XMtA_7GgzauVtyNIsdKFhQ40ua9J96-Lh4rdMU/s400/Czech+Retail+Sales.png" /></a>
<br />
<br />This persistent weakness in domestic consumption is all the more striking in the Czech case, given that real GDP is now almost back at pre-crisis levels.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfFYnvBkth3Ddn9zsJSEOTyECeOk0BjFWJa2uSJ3phv5U-0vowZHCkZ1cKYsVCWWxUQUhNCcSKRvMKDucr3FYyWVP6EQWmTefm38UXX4oTgK07n5Uops5rpL4JZ5Qj2ou0U0hzDNezRMQ/s1600/Czech+constant+price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfFYnvBkth3Ddn9zsJSEOTyECeOk0BjFWJa2uSJ3phv5U-0vowZHCkZ1cKYsVCWWxUQUhNCcSKRvMKDucr3FYyWVP6EQWmTefm38UXX4oTgK07n5Uops5rpL4JZ5Qj2ou0U0hzDNezRMQ/s400/Czech+constant+price+GDP.png" /></a>
<br />
<br />The Czech example is illustrative, since it is one of the best case scenarios, and unfortunately, when we look at the regional neigbours, we find that in general things only get worse.
<br />
<br />
<br /><strong>Romanian Growth Holiday</strong>
<br />
<br />Romania has struggled far longer than any other CEE economy to emerge from recession, only grew (q-o-q) by 0.1%, following a 0.7% quarterly rate of increase in the first quarter.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVyy2dKmxhyphenhyphenizEcLUH8yeOHbzOieiqor9SK7LeRpuNKBo5VwKQnz-xj2DV-C88b6JzdysfFYjpeceQ4wzULAceRtaHgjKrFy17sabYwVbS2VLxjrbSuLNHwZ4cVuqrTSxQ9ul-UcZxCPw/s1600/Romania+GDP+q-o-q.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVyy2dKmxhyphenhyphenizEcLUH8yeOHbzOieiqor9SK7LeRpuNKBo5VwKQnz-xj2DV-C88b6JzdysfFYjpeceQ4wzULAceRtaHgjKrFy17sabYwVbS2VLxjrbSuLNHwZ4cVuqrTSxQ9ul-UcZxCPw/s400/Romania+GDP+q-o-q.png" /></a>
<br />
<br />Even though there is some discrepancy between the data published by the national statistics office and by Eurostat, it is clear that Romanian GDP is barely up from one year ago.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3tCyxuCt6OFPN-zbUZrpAG39Tf51Nv-WPQLI-MOYsvL2EZVWAakJ1dbOtbiPLHxLIUc0uK4xfbCkhsTwTFGJn2sUsILEFsP3QchLlyMIGaSM_n3VonH8bYIe5-h3XjPRG4YB5-_A4Sj4/s1600/romania+GDP+y-o-y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3tCyxuCt6OFPN-zbUZrpAG39Tf51Nv-WPQLI-MOYsvL2EZVWAakJ1dbOtbiPLHxLIUc0uK4xfbCkhsTwTFGJn2sUsILEFsP3QchLlyMIGaSM_n3VonH8bYIe5-h3XjPRG4YB5-_A4Sj4/s400/romania+GDP+y-o-y.png" /></a>
<br />
<br />And indeed is still something like 8.5% below its pre-crisis peak.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoD47zwxmcDEQaGoJR3ZxPMri930zK2M6t0lQgmFQzeoQSJffVRI8C9laSNBWNC1KwO-Hb-l1_6II7AFrWFuIhXFJISsYBBc0NhYewEcWiuIBl_qLKg8HXTHF7bNRpvDS9z107nAlKzK8/s1600/Romania+Constant+Price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoD47zwxmcDEQaGoJR3ZxPMri930zK2M6t0lQgmFQzeoQSJffVRI8C9laSNBWNC1KwO-Hb-l1_6II7AFrWFuIhXFJISsYBBc0NhYewEcWiuIBl_qLKg8HXTHF7bNRpvDS9z107nAlKzK8/s400/Romania+Constant+Price+GDP.png" /></a>
<br />
<br />This despite the fact that exports have been booming, and are now above the pre-crisis level.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh09HXFkNI-O6PuPYCRDwbtYsWhaSYXTdiQDzlD6RdbbzWKa301SSl1c66IRiqNfA06SjrFujBeLydGjhExfEx46M_U3dQTF2fA5BmGDMIZfJxGbmg4cqPZ5C6SRbdwt4FTXWl2lnAPgAI/s1600/Romania+Exports.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh09HXFkNI-O6PuPYCRDwbtYsWhaSYXTdiQDzlD6RdbbzWKa301SSl1c66IRiqNfA06SjrFujBeLydGjhExfEx46M_U3dQTF2fA5BmGDMIZfJxGbmg4cqPZ5C6SRbdwt4FTXWl2lnAPgAI/s400/Romania+Exports.png" /></a>
<br />As per the regional pattern, domestic demand has not recovered and retail sales are falling.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhF59marfYKmk2HEoFpnL5_iqXXUcCh5yRRJ0G4jyCTXWGbJu3pEjM6PHs3z0ZL886wdb4jEOddd5s3O4qL1ESpe3c9xC3pVEOPo-tuBv5DKbEKveDKuQLLNkDZagL8drKTqnhWQkT7LE/s1600/retail+sales+index.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhF59marfYKmk2HEoFpnL5_iqXXUcCh5yRRJ0G4jyCTXWGbJu3pEjM6PHs3z0ZL886wdb4jEOddd5s3O4qL1ESpe3c9xC3pVEOPo-tuBv5DKbEKveDKuQLLNkDZagL8drKTqnhWQkT7LE/s400/retail+sales+index.png" /></a>
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgs5zfEmkGm5xf07H3HSKMNnfsFQekv86D3AC8EK-9Zgj4Ux9LnwPxL3Yz9P89uF1lvkgUmiGoBRGC0uJ72jxbvTtDkYQg35GOgXY-IwjPmW7EGXLDXxczCmnM6ovZFMRVCf9IJtVjHEuw/s1600/Romania+Constant+Price+Household+Consumption.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgs5zfEmkGm5xf07H3HSKMNnfsFQekv86D3AC8EK-9Zgj4Ux9LnwPxL3Yz9P89uF1lvkgUmiGoBRGC0uJ72jxbvTtDkYQg35GOgXY-IwjPmW7EGXLDXxczCmnM6ovZFMRVCf9IJtVjHEuw/s400/Romania+Constant+Price+Household+Consumption.png" /></a> </p>
<br />
<br />
<br />Construction is well down, and is unlikely to return to pre-crisis levels. </p>
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7XbvtPpvy49JMQur_gpYD2Aw9hxxcLXrmBwx9snE7PX1FBqtbu-XYRgKGbqkw5xhidvc3Xxf_2zvhhmMdoJIA30VbOT2tLx-bzLlSxBC_bdjF-ZlokfQn9uQf6UlXiU7FZtX6i6rQ43o/s1600/construction+index.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7XbvtPpvy49JMQur_gpYD2Aw9hxxcLXrmBwx9snE7PX1FBqtbu-XYRgKGbqkw5xhidvc3Xxf_2zvhhmMdoJIA30VbOT2tLx-bzLlSxBC_bdjF-ZlokfQn9uQf6UlXiU7FZtX6i6rQ43o/s400/construction+index.png" /></a> </p>
<br />
<br />
<br />But Romania and the other countries we are about to look at suffer from an additional problem - the have significant external debt levels, and despite the activation of <a href="http://www.ebrdblog.com/wordpress/2011/04/the-vienna-initiative-moves-into-a-new-phase-out-of-crisis-coordination-towards-crisis-prevention/">the so called Vienna initiative </a>they continue to suffer from very tight credit conditions.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgw3-XECBEiVtM5LpaiNKGJMlKWlaojXpPSy68CFKZILr4mJ3KaLFh8oci-LYeHCc89l7TLc7D-i9ICmziISqQLgoHM0ZGTKeDBiBCHGyHcMrfYu58A_IVsFr-S0iGG-HSdUq9na6Lm6ug/s1600/Romania+Total+Non+Government+Credit.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgw3-XECBEiVtM5LpaiNKGJMlKWlaojXpPSy68CFKZILr4mJ3KaLFh8oci-LYeHCc89l7TLc7D-i9ICmziISqQLgoHM0ZGTKeDBiBCHGyHcMrfYu58A_IVsFr-S0iGG-HSdUq9na6Lm6ug/s400/Romania+Total+Non+Government+Credit.png" /></a>
<br />
<br />Total Romanian government debt is not high (only just over 35% of GDP), but the country does suffer from deficit problems (6.5% of GDP in 2010), while external debt is over 70% of GDP (a lot of this in forex loans to the private sector). The country continues to run a significant current account deficit (4.2% of GDP in 2010):
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgq2eV8aeNxl8XmVhMB6KqXele0m-pjPKTQkujF-Q8fKPcVM80By73Hl9Tp2tMqPCsz-CX464VwqZYnqf8Xt9_bL8wsLE_7qjaCwJvYChEgq41UlyjL-pjLtTj4VXxFCgLMB8b19RAQjSs/s1600/Romania+Current+Account+Deficit.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgq2eV8aeNxl8XmVhMB6KqXele0m-pjPKTQkujF-Q8fKPcVM80By73Hl9Tp2tMqPCsz-CX464VwqZYnqf8Xt9_bL8wsLE_7qjaCwJvYChEgq41UlyjL-pjLtTj4VXxFCgLMB8b19RAQjSs/s400/Romania+Current+Account+Deficit.png" /></a>
<br />
<br />and inflation has been far higher than is desireable, given that the country cannot easily devalue to restore competitiveness given the external debt exposure.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJY1mgtH8nnLRQVoyQqSb3Yvyem9Cj_BPrr5YPVoyUR0rGjnIE-_q831SZ54qHeBg6G-Jp-cc8yX9mH6hwjj5ggnitgvwbFmGO6clDd-Sase1aCO1V1BNAEeitCwpYskB7i-W0sjXGGSA/s1600/CPI+YoY.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJY1mgtH8nnLRQVoyQqSb3Yvyem9Cj_BPrr5YPVoyUR0rGjnIE-_q831SZ54qHeBg6G-Jp-cc8yX9mH6hwjj5ggnitgvwbFmGO6clDd-Sase1aCO1V1BNAEeitCwpYskB7i-W0sjXGGSA/s400/CPI+YoY.png" /></a>
<br />
<br />True, the inflation rate was exacerbated by a 5% VAT rise in July 2010 and the annual rate has now fallen back from 8% in June to 4.9% in July, but I really would question the wisdom of the widespread recourse to VAT rises made by the IMF, since while they do offer a fairly quick short term fix to deficit issues, they only compound growth and external competitiveness problems, in particular in cases where devaluation is not a quick'n easy option.
<br />
<br /><strong>Bulgaria's Limp-along Economy</strong>
<br />
<br />The Bulgarian case is not dissimilar to the Romanian one, even though the economy did return to growth in the second quarter of last year. Growth screeched to a virtual halt in the most recent quarter (0.1% q-o-q):
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBxQpb_aQ7M_Om1eUQgMO8EXIqpwx7kwKg83lKTrg1vvdKCXQOuIaHKvc6iFs4pRqQXglYVFPydh2OJ5pBPCBZChXSISTBLO332MdvgZFTmX8omdkCMHassJ6VFnRe6ykMiNMDrWMovNE/s1600/bulgaria+GDP+q-o-q.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBxQpb_aQ7M_Om1eUQgMO8EXIqpwx7kwKg83lKTrg1vvdKCXQOuIaHKvc6iFs4pRqQXglYVFPydh2OJ5pBPCBZChXSISTBLO332MdvgZFTmX8omdkCMHassJ6VFnRe6ykMiNMDrWMovNE/s400/bulgaria+GDP+q-o-q.png" /></a>
<br />
<br />while interannual growth slowed to 1.9% from 3.4% in the first quarter. </p>
<br />
<br />
<br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjY3VuGMPmw4Ob-pG_vWW4WEgUNo0xEQafzc5XDwM_HZvEyG5Vf5Alc2CuCh9EVXlEoiatOhG30DeIupyFWPbFwJxXY9Fj2yCKbt8utHcni5R46J2ThfSKafGVY6stpJ5wUZclFrBMwIT0/s1600/bulgaria+GDP+y-o-y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjY3VuGMPmw4Ob-pG_vWW4WEgUNo0xEQafzc5XDwM_HZvEyG5Vf5Alc2CuCh9EVXlEoiatOhG30DeIupyFWPbFwJxXY9Fj2yCKbt8utHcni5R46J2ThfSKafGVY6stpJ5wUZclFrBMwIT0/s400/bulgaria+GDP+y-o-y.png" /></a>
<br />
<br />Bulgarian GDP has recovered rather more than it has in Romania, but at the end of June it was still more than 7% down from the pre crisis peak level.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgt04_JHnqTiIA8vP2j_zfZqxL7_JQj5K0TT6GwPqG1iiw0NTQcwhzZFufyyM-O4FbAzwFOHTH1mQHmEUuyQ8PIpgsAu-DrqFADV86b8zyE_7cxqSrOJfQxRNK7viQDYHR54ZEILuB-aow/s1600/Bulgaria+Constant+Price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgt04_JHnqTiIA8vP2j_zfZqxL7_JQj5K0TT6GwPqG1iiw0NTQcwhzZFufyyM-O4FbAzwFOHTH1mQHmEUuyQ8PIpgsAu-DrqFADV86b8zyE_7cxqSrOJfQxRNK7viQDYHR54ZEILuB-aow/s400/Bulgaria+Constant+Price+GDP.png" /></a>
<br />
<br />The explanation for the weak recovery is the same as elsewhere, with domestic consumption stagnant, and retail sales in tendential decline.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJK69qlBmn0wONQ6rIZvUxiQvMhKVe0TrQoKYU-Ifhl0dCXIoj8bvBf8VytBdEJ49t9UDoOPlzSHLkyrtauaVH7iXGSZ__krxAKnMxTBad4-FrjmLleCNlER2mKH1uQY8Jjjnl5Xs28cc/s1600/Bulgaria+Constant+Price+Household+Consumption.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJK69qlBmn0wONQ6rIZvUxiQvMhKVe0TrQoKYU-Ifhl0dCXIoj8bvBf8VytBdEJ49t9UDoOPlzSHLkyrtauaVH7iXGSZ__krxAKnMxTBad4-FrjmLleCNlER2mKH1uQY8Jjjnl5Xs28cc/s400/Bulgaria+Constant+Price+Household+Consumption.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTNJvZLsf3_HE4gwR95BylXr6zhv7IhIJITc3rlm5dSsyT9opOVCcnkuAzHxrgLRTWb2CuD9Xl1X7lGzHLJc07F9td-l-Ht7QS-oGOfdCNYTm11ewi41b7PWt1HknmGTw5vY8Aohssg-8/s1600/bulgaria+retail+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTNJvZLsf3_HE4gwR95BylXr6zhv7IhIJITc3rlm5dSsyT9opOVCcnkuAzHxrgLRTWb2CuD9Xl1X7lGzHLJc07F9td-l-Ht7QS-oGOfdCNYTm11ewi41b7PWt1HknmGTw5vY8Aohssg-8/s400/bulgaria+retail+two.png" /></a>
<br />
<br />Construction has also slumped significantly.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrgLkie5JMQA_XZ8YXwf4m3hJjD3lpus3bqCJi8cr3iFLM-R-eNQwOWsSOZKApt_zUYAcMTCLxB6bJifHcgB0gsAiurzFgZNKSmn6HwCISo0VpjeUQgZ-Hz10c72NLwaCeTI9SmeXuO3E/s1600/bulgaria+construction.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrgLkie5JMQA_XZ8YXwf4m3hJjD3lpus3bqCJi8cr3iFLM-R-eNQwOWsSOZKApt_zUYAcMTCLxB6bJifHcgB0gsAiurzFgZNKSmn6HwCISo0VpjeUQgZ-Hz10c72NLwaCeTI9SmeXuO3E/s400/bulgaria+construction.png" /></a>
<br />
<br />In addition to the credit crunch which is to be found elsewhere, Bulgaria faces the added difficulty that many banks are Greek owned, and are themselves facing a liquidity stretch at home.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBVqtTMTrPHJWU1z3ZegipM34jBF5ukB7L2uoWu9GT5inMhEfm0RYvzwevT1Zyy57NnqGHiDQiZrAcdA_AUAmqBLIXWvmb-ZKYstlFGgz768FK2Aglg1UIRU5kmAKP9LsjSitCBpD9Hso/s1600/Bulgaria+Total+Loans.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBVqtTMTrPHJWU1z3ZegipM34jBF5ukB7L2uoWu9GT5inMhEfm0RYvzwevT1Zyy57NnqGHiDQiZrAcdA_AUAmqBLIXWvmb-ZKYstlFGgz768FK2Aglg1UIRU5kmAKP9LsjSitCBpD9Hso/s400/Bulgaria+Total+Loans.png" /></a>
<br />
<br />Yet despite the Euro peg the country continues to run a sizeable inflation rate, and competitiveness - as measured by the REER - continues to deteriorate. Thus an export sector which in value added terms is already too small for the job it has to do is facing headwinds which don't exactly encourage expansion.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKVq3VVJ9BSf7WbEbLIRKMPXqrfCyeZ6li7Z-7CoOdwvBXkVHfaxH4xiIdpieig9QDwBpNi8lDGe8N-kt8XdjBydP5U_hVxIP5Wd06vre3TZtsAFwMzK86c60QudxPfXrCvaAPyCn5S2I/s1600/bulgaria+CPI.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKVq3VVJ9BSf7WbEbLIRKMPXqrfCyeZ6li7Z-7CoOdwvBXkVHfaxH4xiIdpieig9QDwBpNi8lDGe8N-kt8XdjBydP5U_hVxIP5Wd06vre3TZtsAFwMzK86c60QudxPfXrCvaAPyCn5S2I/s400/bulgaria+CPI.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSlqNu46CZ-Y1xNmpyFD0D1CuOWYO3hrM743BtyCQCY2dX9z_gyvEcinIp8M1F3F-ueCMUWX4c1ed0GU6yc9JprHklnR-qwGDXhy80LL4CXBV7-yPsmQWKmDU4v7V67z6mTZTdc1BZLn8/s1600/Bulgaria+REER+monthly.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSlqNu46CZ-Y1xNmpyFD0D1CuOWYO3hrM743BtyCQCY2dX9z_gyvEcinIp8M1F3F-ueCMUWX4c1ed0GU6yc9JprHklnR-qwGDXhy80LL4CXBV7-yPsmQWKmDU4v7V67z6mTZTdc1BZLn8/s400/Bulgaria+REER+monthly.png" /></a>
<br />
<br />
<br /><strong>Hungary Had No Boom, But The "Bust" Continues</strong></p>
<br />
<br />Hungary's GDP growth basically stalled in the second quarter (0.0% q-o-q), taking the year-on-year rate down from 2.4% to 1.5% in the first quarter. This is well below consensus expectations (2.5%) and also worse than the central bank forecast of around 2.2%. The pull from net trade evidentally weakened substantially, and in an economy that only has one cylinder to fire on (exports) this makes itself noticed quickly.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh31kKR5a2y8oBfV7dBIN84IkZmPqrHIfJaQzBfTvXGDrYgQs746sxBl1UbRojso3GC82XSU8hH4JuqEunaXUA6f09DIU28Hmm4BUvCIYWSbBZoemS9C6aVmG9hm_ILiNv1wmoWzsxwGjI/s1600/Hungary+GDP+q-o-q.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh31kKR5a2y8oBfV7dBIN84IkZmPqrHIfJaQzBfTvXGDrYgQs746sxBl1UbRojso3GC82XSU8hH4JuqEunaXUA6f09DIU28Hmm4BUvCIYWSbBZoemS9C6aVmG9hm_ILiNv1wmoWzsxwGjI/s400/Hungary+GDP+q-o-q.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKJR0IxPpw9HROX7YctjV6LJFD_oJRnnvj7MRR6duuRLm2HnJopAiWK-Z6kr3fY2Z66Wpinhe3EWGXMG2Ll5R1_4fYu7ZQYgs_VWDI4uCr4nUWC0dzD2wBBRnTMdzYOdw6VLRtYn73FrQ/s1600/Hungary+GDP+Y-o-Y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKJR0IxPpw9HROX7YctjV6LJFD_oJRnnvj7MRR6duuRLm2HnJopAiWK-Z6kr3fY2Z66Wpinhe3EWGXMG2Ll5R1_4fYu7ZQYgs_VWDI4uCr4nUWC0dzD2wBBRnTMdzYOdw6VLRtYn73FrQ/s400/Hungary+GDP+Y-o-Y.png" /></a>
<br />
<br />
<br />Hungarian exports have risen well since early 2009, but in recent months growth in both these and industrial output has tapered off.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWMoDVKLBUFUBcuKk2BVplWpBA96XwqVbbrl1Fx_nE65L-xiejpdQISpOc_tJDJcT5ou7ap3kUh29awtmEQxSOce6TDkgos4dzpeKdSDBLpfecgX6EZVr39AvmxHXFDbVf6pXlE5uoLqM/s1600/hungary+exports+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWMoDVKLBUFUBcuKk2BVplWpBA96XwqVbbrl1Fx_nE65L-xiejpdQISpOc_tJDJcT5ou7ap3kUh29awtmEQxSOce6TDkgos4dzpeKdSDBLpfecgX6EZVr39AvmxHXFDbVf6pXlE5uoLqM/s400/hungary+exports+two.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEkTPv_lGphF0tjfzEnAI8kKc25cNLb1jBLYvgqnSsWxDRXPdO4VYjXOFfv4MC34ZkjDT-MsG1MNTV-vV2ZKuawuOt_kwTuf-ZDhY5OePbcqRKLaRExJJyjCN-PW-uY5-8nlyiAJnklBE/s1600/hungary+IP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEkTPv_lGphF0tjfzEnAI8kKc25cNLb1jBLYvgqnSsWxDRXPdO4VYjXOFfv4MC34ZkjDT-MsG1MNTV-vV2ZKuawuOt_kwTuf-ZDhY5OePbcqRKLaRExJJyjCN-PW-uY5-8nlyiAJnklBE/s400/hungary+IP.png" /></a>
<br />
<br />Hungarian GDP is still over 8% down from the pre-crisis peak.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSOiA6MfkwStYBbD0LhvXBC_wva6vKenWoqoxz__xF5lLvuOky1EjcqfBZV7oPjAAPtD2aM2KAZey7EqAG1Iw-QzuUFFsCeZi72xXy05lP7Ky_L8-PorDTW6Fg9cOkoGcBcRrfTOHh4Zc/s1600/Hungary+Constant+Price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSOiA6MfkwStYBbD0LhvXBC_wva6vKenWoqoxz__xF5lLvuOky1EjcqfBZV7oPjAAPtD2aM2KAZey7EqAG1Iw-QzuUFFsCeZi72xXy05lP7Ky_L8-PorDTW6Fg9cOkoGcBcRrfTOHh4Zc/s400/Hungary+Constant+Price+GDP.png" /></a>
<br />
<br />Household consumption has not recovered at all, and retail sales continue to fall.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvG2gbbV5GkmZjHJOPLpRauudR_HoNutE4m1KVWAVFyXlnYTsftV4h_INXtWbbbPdEaefnz81R-HTUeeiT4XCvgIHcuPabgg3-b-whH0hu08I2Zn4cO071XsIlMc5X8nRXDFRzDmFPnho/s1600/Hungary+Constant+Price+Household+Consumption.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvG2gbbV5GkmZjHJOPLpRauudR_HoNutE4m1KVWAVFyXlnYTsftV4h_INXtWbbbPdEaefnz81R-HTUeeiT4XCvgIHcuPabgg3-b-whH0hu08I2Zn4cO071XsIlMc5X8nRXDFRzDmFPnho/s400/Hungary+Constant+Price+Household+Consumption.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEia-4LCATIrvyIUYrv2D75Z0YIzG7e4NHUF1kKxZd5iqgFhhWpWRcxuHUBz4E_yPxLMdpAOkbeHYt8DHPCDRmICFVirW6g4zJr9xAkEZMiVuhj-92wgKScomKnHWyD1qiPPAEn6wEW8C7o/s1600/hungary+retail+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEia-4LCATIrvyIUYrv2D75Z0YIzG7e4NHUF1kKxZd5iqgFhhWpWRcxuHUBz4E_yPxLMdpAOkbeHYt8DHPCDRmICFVirW6g4zJr9xAkEZMiVuhj-92wgKScomKnHWyD1qiPPAEn6wEW8C7o/s400/hungary+retail+two.png" /></a>
<br />
<br />Again, construction activity is trending down.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgH70LwZdfSGmWOMbTUibOJTS7XeYiAsoQa63pNVNIrBfSuIHbb2ZdZgR1pFN1kOLrj35xofn4bgWYChQ7AXrVvWQ0vRm15xZsqzi-zO5YWobKxFsLEWoxlCgNRMI0vRVxf6dZ8b0ker1o/s1600/hungary+construction+index.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgH70LwZdfSGmWOMbTUibOJTS7XeYiAsoQa63pNVNIrBfSuIHbb2ZdZgR1pFN1kOLrj35xofn4bgWYChQ7AXrVvWQ0vRm15xZsqzi-zO5YWobKxFsLEWoxlCgNRMI0vRVxf6dZ8b0ker1o/s400/hungary+construction+index.png" /></a>
<br />
<br />The Hungarian current account has recovered considerably, and the country now runs a surplus, unfortunately not a large enough one to underpin stable growth.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinIz1m-aJPi4qhamCrusYB7NMLMs49JFBIWmG_qtrSxZstykxTaMdNnZPQilDw5oXPnulOdmn3a5lqWPj7e12ealJW4__fYqgI0XfQVrGV-1s7c9fUCU9LP5gErsh_ndA36L2d1E3junI/s1600/Hungary+Current+Account+balance+%2528quarterly%2529.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinIz1m-aJPi4qhamCrusYB7NMLMs49JFBIWmG_qtrSxZstykxTaMdNnZPQilDw5oXPnulOdmn3a5lqWPj7e12ealJW4__fYqgI0XfQVrGV-1s7c9fUCU9LP5gErsh_ndA36L2d1E3junI/s400/Hungary+Current+Account+balance+%2528quarterly%2529.png" /></a>
<br />
<br />
<br />The stock of CHF private sector loans is equivalent to approximately 20% of GDP, most of it made up of household loans (18% of GDP). Roughly half of these loans are mortgages, and the other half consists of home equity loans. As shown in the chart below (housing loans only, but representative of the whole), most of these loans were contracted in 2005- 08, when the consensus view was that the forint was in a secular appreciation trend versus EUR as well as CHF and Hungarians felt safe about borrowing at much cheaper foreign interest rates. People were focused on the repayment size, and not the capital value movements, rather like people have recently been focusing on public deficit issues, without thinking too much about debt dynamics (until Italy came barging along, that is).
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3H8fVi2ohcfLeMc1dEHRsopj5dFixsPM0sT7gj56aQn-chB38U_4mQFsn8bP2tUbjhA8VkvdKNe3BAPKGN5wIEQXvVeXQFz2ma3NbzpsMI5-0Hm2NHS99R5Y4TEaaxZmbSPcfX9P-lrQ/s1600/Hungary+forex+mortgages.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3H8fVi2ohcfLeMc1dEHRsopj5dFixsPM0sT7gj56aQn-chB38U_4mQFsn8bP2tUbjhA8VkvdKNe3BAPKGN5wIEQXvVeXQFz2ma3NbzpsMI5-0Hm2NHS99R5Y4TEaaxZmbSPcfX9P-lrQ/s400/Hungary+forex+mortgages.png" /></a>
<br />
<br />In 2005, the average rate for a home equity loan in CHF was 4.8%, compared to 6.2% in EUR and 17.6% in local currency.The upward surge in the CHF together with increases in interest rates on CHF loans since these were intitially taken out means that the repayments on these mortgages have risen significantly. Morgan Stanley estimate that the average repayment on a CHF mortgage taken out over 2005-07 is up over 50%.
<br />
<br />Carrying out some simple back-of-the-envelope calculations they also arrived at the conclusion that servicing this debt at an 8% interest rate costs Hungarians around 2% of GDP every year. Absent the adverse FX shock, servicing costs would have been around 1.4% of GDP. The 0.6% difference can be seen as a kind of growth penalty, hamstringing what would already have been pretty weak domestic consumtion. According to Morgan Stanley calculations, the rise in CHF since 2008 has had the equivalent impact on Hungarian FX borrowers of a 6% rate increase.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR9SyGXDqxt2yYZ4yR8F2iVte6aNzWneeXUvT_icOxRWbtoFT9y-BTIszTeuBqvCXWKKcDfUVhPivRB6Dr6sSs6ztEtzxL9NQctGUp85dNkCehXFJyZ3WtSz_myXSL650a8_qVdhrRY1g/s1600/Hungary+Total+mortgage+lending+y-o-y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR9SyGXDqxt2yYZ4yR8F2iVte6aNzWneeXUvT_icOxRWbtoFT9y-BTIszTeuBqvCXWKKcDfUVhPivRB6Dr6sSs6ztEtzxL9NQctGUp85dNkCehXFJyZ3WtSz_myXSL650a8_qVdhrRY1g/s400/Hungary+Total+mortgage+lending+y-o-y.png" /></a>
<br />
<br />And it isn't only householders who are suffering from Forex risk. Hungary's gross external debt is around 135% of GDP. The country has the largest public debt in the region (around 80% of GDP), and although one off measures with the pension system mean that this will fall this year, the upward path may then resume unless the country has a growth revolution. Worse, 45% of public debt is not in Forints (and some of it is even in Swiss Francs), meaning that currency depreciation risk exists. All in all, it is very had to see the country being able to find its way onto a sustainable debt path.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5A-VFnndd3EYiT2TjVq2FqKtec4YIEy0JrRSn5xfbqhnBjF8yvIHb5UtLrRV1Pa2S8LZJF4GJt88Nrjuf77fe5yvGQxiqnMehPuDhLNic3Xb4gg1xNAzm1jXGaeTvVB463_8YmbifdQY/s1600/Hungary+Gross+External+Debt.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5A-VFnndd3EYiT2TjVq2FqKtec4YIEy0JrRSn5xfbqhnBjF8yvIHb5UtLrRV1Pa2S8LZJF4GJt88Nrjuf77fe5yvGQxiqnMehPuDhLNic3Xb4gg1xNAzm1jXGaeTvVB463_8YmbifdQY/s400/Hungary+Gross+External+Debt.png" /></a>
<br />
<br /><strong>Drifting Towards Export Dependence Too Slowly For Comfort?</strong>
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifU1cyYHzmLDUyiai__6UBUfRaaQqK6TAMuqGETpxHUcSI8xror0KYlaDmZ47gdOiL7N1ZZsrh9NQZgxILSRVcgBPsW5oHaoPr1RFeMptABp1XO1ch_IZuo9eEzisM9ANN8ETnbF1AHug/s1600/Romania+Population.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifU1cyYHzmLDUyiai__6UBUfRaaQqK6TAMuqGETpxHUcSI8xror0KYlaDmZ47gdOiL7N1ZZsrh9NQZgxILSRVcgBPsW5oHaoPr1RFeMptABp1XO1ch_IZuo9eEzisM9ANN8ETnbF1AHug/s400/Romania+Population.png" /></a>
<br />
<br />
<br />The recent enthusiasm we have seen for the East European model has a nasty and worrying precedent, since in the years leading up to the financial crisis those who lauded the merits of the European Union’s newest members were not few in number. They were seen as the high-growth members of the Union who had learnt the costly lessson that big government was to be strenously avoided. Such was the enthusiasm that even the very evident and very substantial current account deficits were considered almost benign. But then, as even, after pride came the fall, as one country after another had financing difficulties and became forced to call in the IMF.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivnCvoM2_4Hl5YXk6n-vschLX-cyNxauGhvgvgnzd29k0srNoIog5n_ip6ykkptKuxVmQxoyggxnv2KB8Smd64XGYJ9_8bszFJwVFdU6TFDONSRHgyxggThuSh-Z9u9v5IO-f49NJDKCM/s1600/bulgaria+population.png"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 259px" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivnCvoM2_4Hl5YXk6n-vschLX-cyNxauGhvgvgnzd29k0srNoIog5n_ip6ykkptKuxVmQxoyggxnv2KB8Smd64XGYJ9_8bszFJwVFdU6TFDONSRHgyxggThuSh-Z9u9v5IO-f49NJDKCM/s400/bulgaria+population.png" border="0" /></a>
<br />
<br />
<br />Now countries in the East are cited for their low debt, and capacity to accept sacrifices in avoiding excessive deficits. Two issues stand out as important: the prevalence of unhedged forex debt and the regions unique demographics. Just like in the Euro Area's Southern Periphery the presence of forex borrowing severely limits devaluation as a potential competitiveness restorer, while ageing and declining populations mean that the economies are increasingly export dependent. This means they often have both increased exposure to global slowdowns (or recessions), combined with an external financing dependency when sources of funding may rapidly dry up.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiR_3hKOeMT_OO11Pe3c5ZE2r9sRES_7ZUGQTLsaIqOvnaFMEW_A0R2JwWddlH74vAWx-Ov_Gdv4PuNFVV1nP37TaJ_95rbz5IiIZ1KkdoQA81aG0jS64vj_u2OFYeGOfHG4lnsM-J3YFs/s1600/hungary+population.png"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 219px" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiR_3hKOeMT_OO11Pe3c5ZE2r9sRES_7ZUGQTLsaIqOvnaFMEW_A0R2JwWddlH74vAWx-Ov_Gdv4PuNFVV1nP37TaJ_95rbz5IiIZ1KkdoQA81aG0jS64vj_u2OFYeGOfHG4lnsM-J3YFs/s400/hungary+population.png" border="0" /></a>
<br />
<br />
<br />Evidently, societies with young, growing populations can hope that the sheer pace of economic growth will eventually burn down their debt, but societies with shrinking populations, and rapidly rising elderly dependency ratios cannot adopt such a complacent attitude. Older societies are normally lower growth societies, and in addition, with the number of people of working age falling and falling, an ever greater burden falls on an ever smaller labour force. All four countries in our sample are pioneeers in this regard, sounding out the frontiers of a world in constant decline, a world which is ever older.
<br />
<br />This post first appeared on my Roubini Global Economonitor Blog "<a href="http://www.economonitor.com/blog/author/ehugh3/">Don't Shoot The Messenger</a>".Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-84165361539375411592009-08-14T02:03:00.000-07:002009-08-18T06:05:37.334-07:00From Original Sin To The Eternal Triangle - Lessons From Central EuropeThe non-biblical concept of original sin, as <a href="http://fistfulofeuros.net/afoe/economics-and-demography/escaping-original-sin-in-hungary/">Claus Vistesen notes in this post</a>, when propounded in its standard Obstfeld & Krugman textbook version refers to the situation where many developing economies who are not able to borrow in their own currencies feel forced to denominate large parts of their sovereign and private sector debt in non-domestic currencies in order to attract capital from foreign investors - as evidenced most recently in the countries of Central and Eastern Europe. Well, piling insult upon injury, I'd like to take Claus's point a little further, and do so by drawing on another well tried and tested weapon from the Krugman armoury, the idea of the "eternal triangle".<br /><br />As is evident, the reality which lies behind the current crisis in the EU10 is complex, and has its origin in a variety of causes. But one key factor has undoubtedly been the decisions the various countries took when thinking about their monetary policy and currency regimes. The case of the legendary euro "peggers" - the three Baltic countries and Bulgaria - has been receiving plenty of media attention on late, and two of the remaining six (Slovenia and Slovakia) are now members of the Eurozone, but what of the other four, Romania, Hungary, Poland and The Czech Republic? What can be learnt from the experience of these countries in the present crisis.<br /><br />Well, one convenient way of thinking about what just happened could be to use Nobel Economist Paul Krugman’s Eternal Triangle” model (<a href="http://web.mit.edu/krugman/www/triangle.html">see his summary here</a>), which postulates that when it comes to tensions within the strategic trio formed by exchange rate policy, monetary policy, and international liquidity flows, maintaining control over any one implies a loss of control in one of the other two.<br /><br />In the case of the Central Europe "four", Poland and the Czech Republic opted for maintaining their grip on monetary policy, thus accepting the need for their currency to "freefloat" and move according to the ebbs and flows of market sentiment. As it turns out this decision has served them remarkably well, since the real appreciation in their currencies which accompanied the good times helped take some of the sting out of inflation, while their ability to rapidly reduce interest rates into the downturn has lead to currency depreciation, helping to sustain exports and avoid deflation related issues.<br /><br />The other two countries (Hungary and Romania), to a greater or lesser degree prioritised currency stability, and as a result had to sacrifice a lot of control over monetary policy, in the process exposing themselves to the risk of much more violent swings in market sentiment when it comes to capital flows. Having been pushed by the logic of their currency decision towards tolerating higher inflation, they have seen the competitiveness of their home industries gradually undermined, and as a consequence found themselves pushed into large current account deficits for just as long the market was prepared to support them, and into sharp domestic contractions once they were no longer disposed so to do.<br /><br />A second problem which stems from this "initial decision" has been the tendency for households in the latter two countries to overload themselves with unhedged forex loans, a move which stems to some considerable extent from the currency decision, since in order to stabilise the currency, the central banks have had to maintain higher than desireable interest rates, which only reinforced the attractiveness of borrowing in forex, which in turn produced lock-in at the central bank, since it can no longer afford to let the currency slide due to the balance sheet impact on households. Significantly the forex borrowing problem is much less in Poland than it is in Hungary or Romania, and in the Czech Republic it is nearly non-existent.<br /><br />The third consequence of the decision to loosen control on domestic monetary policy has been the need to tolerate higher than desireable inflation, a necessity which was also accompanied by a predisposition to do so (which had its origin in the erroneous belief that the lions share of the wage differential between West and Eastern Europe is an “unfair” reflection of the region’s earlier history, and essentially a market distortion). The result has been, since 2005, a steady increase in unit wage costs with an accompanying loss of competitiveness, and an increasing dependence on external borrowing to fuel domestic consumption.<br /><br />So, if we look at the current state of economic play in the four countries, we find two of them (Hungary and Romania) undergoing very severe economic contractions - to such a degree that in both cases the IMF has had to be called in. At the same time both of them are still having to "grin and bear" higher than desireable inflation and interest rates. In the other two countries the contraction is milder, the financial instability less dramatic, and both inflation and domestic interest rates are much lower. Really, looked at in this light, I think there can be little doubt who made the best decision.<br /><br /><br /><strong>Appendix</strong><br /><br />Here for comparative purposes are charts illustrating the varying degrees of economic contraction, inflation, and interest rates. GDP contraction rates actually present a little problem at the moment, since one of the relevant countries - Poland - still has to report. However Michal Boni, chief adviser to the Prime Minister, told the newspaper Dziennik this week that the economy expanded at an annual rate of between 0.5% and 1% in Q1. So lets take the lower bound as good, it is still an expansion.<br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSJrw90Q75H7za-eSgt1TXzWnRVIaFPWj4lxUCBsWyzpAJtHTqpEd3pz-ZFIymBU0G75FQnK8VKHsxg4uz5zBQ8ajCsMp_lNUS4sS9NrXTa9ibdytB0GMNFbK7vjc8XqowQclPV2yaXYuq/s1600-h/gdp.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520243749636306" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSJrw90Q75H7za-eSgt1TXzWnRVIaFPWj4lxUCBsWyzpAJtHTqpEd3pz-ZFIymBU0G75FQnK8VKHsxg4uz5zBQ8ajCsMp_lNUS4sS9NrXTa9ibdytB0GMNFbK7vjc8XqowQclPV2yaXYuq/s400/gdp.png" /></a><br /><br />The economy in the Czech Republic contracted by an estimated 4.9% year on year in the second quarter.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDs3qO8T56bmXichjVO32N3kQQkGIFzMXKwh3T9RcEa7dk0Ot1pa6jNj0xU4OpZt3LGJSTeHsrrjJquOlvO641cla9kclStIEZR4NPGREX3PIQSUp0Hx5ptlcOKtwhavHvol8PlL-d1rmo/s1600-h/gdp.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 232px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516514917178322" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDs3qO8T56bmXichjVO32N3kQQkGIFzMXKwh3T9RcEa7dk0Ot1pa6jNj0xU4OpZt3LGJSTeHsrrjJquOlvO641cla9kclStIEZR4NPGREX3PIQSUp0Hx5ptlcOKtwhavHvol8PlL-d1rmo/s400/gdp.png" /></a> The Hungarian economy contracted by an estimated 7.4% year on year in Q2.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjuU0nOJTLVpuCTbPK3kkGhUuTOruWal8j-WDo7f85WBSTmEdRCTh8lDBFmVo_JYx0x6Q495puqlPv_9jCxxbHY9n_-ZdBwxwKoq7330Vv8y4k8BimhBeOMSE4G7yWhpGMC9eqnYMCZw8g/s1600-h/gdp+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510800079158962" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjuU0nOJTLVpuCTbPK3kkGhUuTOruWal8j-WDo7f85WBSTmEdRCTh8lDBFmVo_JYx0x6Q495puqlPv_9jCxxbHY9n_-ZdBwxwKoq7330Vv8y4k8BimhBeOMSE4G7yWhpGMC9eqnYMCZw8g/s400/gdp+2.png" /></a><br /><br />While the Romanian economy contracted by an estimated 8.8% year on year.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcM7nNerawd45P0ah1M1-RR-V3RDM3NbmCeeZV0M_8yDSrFaqSTVW-oMbAKMYBmWZ1dPoAl_gXfgoWKkoFF6alXRNeJXr2I0cU5juht82n4CRxaAMij9It2NdXh0g8c9KLomaRwIMMfh1Y/s1600-h/romania+GDP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369513200130394306" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcM7nNerawd45P0ah1M1-RR-V3RDM3NbmCeeZV0M_8yDSrFaqSTVW-oMbAKMYBmWZ1dPoAl_gXfgoWKkoFF6alXRNeJXr2I0cU5juht82n4CRxaAMij9It2NdXh0g8c9KLomaRwIMMfh1Y/s400/romania+GDP.png" /></a><br /><strong>Inflation Rates</strong><br /></p><p>Poland's CPI rose by an annual 4.2% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaOmQOkZlSMJ8KO1nlH1F8eH-_MIXIn4P1v2Cdzi0fHkJ01MaH8rgPr_Pka7FDZgTPRhdaNDUqY08Sf0SB-_icJfVKvVUYT3meXlnbquGO_u-mQKDwbLqIuQf-T5DTvmpIbHCK4ke6iM4l/s1600-h/CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 186px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520178830452706" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaOmQOkZlSMJ8KO1nlH1F8eH-_MIXIn4P1v2Cdzi0fHkJ01MaH8rgPr_Pka7FDZgTPRhdaNDUqY08Sf0SB-_icJfVKvVUYT3meXlnbquGO_u-mQKDwbLqIuQf-T5DTvmpIbHCK4ke6iM4l/s400/CPI.png" /></a><br />The CPI in the Czech Republic rose by an annual 0.3% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSSkImF_O5oInd-27C7kzRIpyIZn6mkZ5GcW60GK2VRf6krk052yLZkOknC2T-q9F9PF0v9_HByWFDpXl5ZzwSjhUJcgQO1yGbl5mO-ivmApip6emvlW-zhg5xTiqFpLnuj-detgyFbpXj/s1600-h/CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 217px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516440042775362" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSSkImF_O5oInd-27C7kzRIpyIZn6mkZ5GcW60GK2VRf6krk052yLZkOknC2T-q9F9PF0v9_HByWFDpXl5ZzwSjhUJcgQO1yGbl5mO-ivmApip6emvlW-zhg5xTiqFpLnuj-detgyFbpXj/s400/CPI.png" /></a><br /><br />Romania's CPI rose by an annual 5.1% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWJDxGBgjSLX_N6hqZHceQlPeg1IEAbU-ql27xuzHzTjrVhX4hTawrBFL85vyIRSbl8v0oI74F_WmAXfxaNUlXNLhpl6JqVYLXbnv9zB0S1S60F5PbZW_qURAyPzcn5IHkyQH8CV_0fPDg/s1600-h/CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369513059447983618" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWJDxGBgjSLX_N6hqZHceQlPeg1IEAbU-ql27xuzHzTjrVhX4hTawrBFL85vyIRSbl8v0oI74F_WmAXfxaNUlXNLhpl6JqVYLXbnv9zB0S1S60F5PbZW_qURAyPzcn5IHkyQH8CV_0fPDg/s400/CPI.png" /></a><br />Polands CPI rose by an annual 5.1% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSJOg-Mdc2CgdInfP-E9VQH8VbVd3KxMagRbZJTbvlPnZemUKvWj1S5obiHCDdpypvoVA4LwKIL5k14B-PTywv7FSu9TK1RfjlKFTCzk2R9Iac9LyVTIDvD5aG-2FhktXQpE_d3dhWnwPV/s1600-h/hungary+CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510635155610482" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSJOg-Mdc2CgdInfP-E9VQH8VbVd3KxMagRbZJTbvlPnZemUKvWj1S5obiHCDdpypvoVA4LwKIL5k14B-PTywv7FSu9TK1RfjlKFTCzk2R9Iac9LyVTIDvD5aG-2FhktXQpE_d3dhWnwPV/s400/hungary+CPI.png" /></a><br /><strong>Interest Rates</strong><br /><br />The benchmark central bank interest rate in Poland is currently 3.5%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaOO-A-eAr4j0Ehb-eTyFh1-iXZwQbQfvaDWbhKFB6vH9uFQHBaMPfMjYoLAEJT2c1ceba9186pfzIDErkmfFacRSTE7_i00xEQJd88yupheY7KhycvEG_fFGOT7mUMuTsp8t7Xx7Eb2QQ/s1600-h/interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520115353289810" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaOO-A-eAr4j0Ehb-eTyFh1-iXZwQbQfvaDWbhKFB6vH9uFQHBaMPfMjYoLAEJT2c1ceba9186pfzIDErkmfFacRSTE7_i00xEQJd88yupheY7KhycvEG_fFGOT7mUMuTsp8t7Xx7Eb2QQ/s400/interest+rates.png" /></a> The benchmark central bank interest rate in the Czech Republic is currently 1.25%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuVwfjuiUD6PYTtsJW7zQ3xdJLlIj_aLOqSkgeYmgzTB7pb2B4cxwr1Bi5adJ6Kx-hMjoI5see841GdH6ICA6ETUP7wLxMND_pAc_TM8Ex35yYQB442ZzKsuRJPuzHHIxGylWG_0KIRD-5/s1600-h/interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516359161761794" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuVwfjuiUD6PYTtsJW7zQ3xdJLlIj_aLOqSkgeYmgzTB7pb2B4cxwr1Bi5adJ6Kx-hMjoI5see841GdH6ICA6ETUP7wLxMND_pAc_TM8Ex35yYQB442ZzKsuRJPuzHHIxGylWG_0KIRD-5/s400/interest+rates.png" /></a><br />The benchmark central bank interest rate in Romania is currently 8.5%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIcf4s1YrvzZ7dblYmVDa5QJYZ97D9eggIWcBZM9Cc8Q-l3eNwHfd0yyI3Wgab3yYM7LYLGj8OLJ02KscaX-8sKPVC-lcJU1buy429yJFVUdHo-d7VQpva6N-7Iiwm70VKW3lEnInBv40/s1600-h/Hungary+interest+rates.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 243px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIcf4s1YrvzZ7dblYmVDa5QJYZ97D9eggIWcBZM9Cc8Q-l3eNwHfd0yyI3Wgab3yYM7LYLGj8OLJ02KscaX-8sKPVC-lcJU1buy429yJFVUdHo-d7VQpva6N-7Iiwm70VKW3lEnInBv40/s400/Hungary+interest+rates.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5371287640518185298" /></a><br /><br />The benchmark central bank interest rate in Hungary is currently 8.5%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBM4MvtLCi8PW3n5B4N9iuOm2X-iJVJwop2DQGcMSqJIS7lYmD8-herkK8gIa3nHqvFOEoCzLTQwQ5ks4TvAM3fKHOLPj6jqEXEu7qzgW4yzfE16IPqyhyphenhyphenj8NsMlv_DWJIMyy_9mWs6WOP/s1600-h/Hungary+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510538558067954" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBM4MvtLCi8PW3n5B4N9iuOm2X-iJVJwop2DQGcMSqJIS7lYmD8-herkK8gIa3nHqvFOEoCzLTQwQ5ks4TvAM3fKHOLPj6jqEXEu7qzgW4yzfE16IPqyhyphenhyphenj8NsMlv_DWJIMyy_9mWs6WOP/s400/Hungary+interest+rates.png" /></a> </p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-18427816279338304552009-03-30T14:03:00.000-07:002009-04-02T13:29:30.310-07:00Romania What Next?With capital inflows to the CEE economies slowing to a trickle in Eastern Europe, a sharp correction is now underway in most countries' external imbalances and in particular in their current-account deficits. For the CEE-6 (Poland, Czech Republic, Hungary, Romania, Bulgaria, Turkey), net private capital flows are forecast to slow to $59.5 billion in 2009, down from an estimated $161.9 billion in 2008, according to estimates from the Institute For International Finance. The basic concern is that those countries with significant external deficits are extremely vulnerable to foreign capital reversals, especially in the current environment of global credit tightening.<br /><br /><br />FDI flows (which are generally considered more stable and less susceptible to rapid outflows than other capital flows) have been the main form of financing for current-account deficits in recent years, but such inflows are set to slow sharply in 2009. The Economist estimates that between 2003 and 20007 FDI inflows (on average) covered almost 100% of the current-account deficit in the ten EU member states. In 2008, this coverage fell to an estimated 55%<br /><br />As FDI has fallen back, debt - particularly intra-bank lending - has become the main financing vehicle for the current-account deficits. Nevertheless, intra-bank lending – that is, lending between foreign parent banks and their subsidiaries in the region – is falling back sharply in 2009, with nett bank lending to emerging Europe, excluding Russia, being projected at around $22 bn in 2009, down from $95 bn in 2008 (according to the Institute for International Finance)<br /><br />Now the central issue is that such corrections in external imbalances can take pplace in one of two ways - either domestic demand drops sharply and/or the currencies weaken significantly. In the case of those countries with an exchange rate peg the second route is not open, hence what we are likely to see is a very sharp contraction. Such contractions are already evident in the Baltics, but what about Bulgaria. How sharp will the correction in Bulgaria be? Only today capital economics have come in with a forecast of 5% contraction over the year. But how realistic is this, let's look at some data.<br /><br />One of the first points I would like to look at is the external trade situation. It is very clear that the Romanian trade deficit is decreasing. The January 2009 goods trade deficit was down to 576.4 million euros, from 2394.7 million euros in January 2008. But as I am saying, it is quite important to understand how this improved trade balance is being achieved. It is not being achieved through an increase in exports, but rather through a decrease in imports, which are falling more quickly than exports are falling. In fact in January 2009 exports were down by 24.3% (in euros) over January 2008, while imports were down by 37.4%, as the following charts make clear.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjt4aSJUlA2PA6AWCwtuIcUon0FA4XeIJ4ok6BGIgnrpidFZdtF7a_q1hQ8zQpfmgtn34rGq8fEhxf_UYpnIGQM92qy32BDvROWqMnhyphenhyphenVMpY9i9c4XrCm_QLhNnY2DQHa8ZgNAKogeIcMgG/s1600-h/romania+exports.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 222px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjt4aSJUlA2PA6AWCwtuIcUon0FA4XeIJ4ok6BGIgnrpidFZdtF7a_q1hQ8zQpfmgtn34rGq8fEhxf_UYpnIGQM92qy32BDvROWqMnhyphenhyphenVMpY9i9c4XrCm_QLhNnY2DQHa8ZgNAKogeIcMgG/s400/romania+exports.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5319093043978426290" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2bcpgZAsHE_dGqUJmjiAO_F86ZC5tr5M4t6SC2A34yISUWPYf61HXwJQZsKQCTVnqmJnO5E2l2GDKom8Bznc4RfYyiCYDyJh1BXeJwnzIIIAM9Yxfrg70wcof6sFNrzc3jl1KsImlw76_/s1600-h/romania+imports.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 222px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2bcpgZAsHE_dGqUJmjiAO_F86ZC5tr5M4t6SC2A34yISUWPYf61HXwJQZsKQCTVnqmJnO5E2l2GDKom8Bznc4RfYyiCYDyJh1BXeJwnzIIIAM9Yxfrg70wcof6sFNrzc3jl1KsImlw76_/s400/romania+imports.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5319092970019369506" /></a><br /><br />The consequence of this decline in external trade is that Romania's current account deficit is falling rapidly, and was already down to nearly 12 percent of its gross domestic product (GDP) in 2008, with most of the improvement in the deficit taking place in the last three months of the year. The current account deficit in 2007 was 14 percent of the GDP, and most analysts had been expecting a widening of the gap in 2008, with some predictions even rising as high as 18 percent.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI0mJZheTL6v23KC6WapHC0o1RIhht-uLFMhsmYBmP3p4zTeNMDygZkyor-dEdHvkvub97DGPAusNMRxjT1nwvChmsd65rCqjXtCOOZHfXJGHFwo7Du-6VAbpkIjsaWpQ2q6oQKEZIkmJL/s1600-h/romania+CA+deficit.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 241px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI0mJZheTL6v23KC6WapHC0o1RIhht-uLFMhsmYBmP3p4zTeNMDygZkyor-dEdHvkvub97DGPAusNMRxjT1nwvChmsd65rCqjXtCOOZHfXJGHFwo7Du-6VAbpkIjsaWpQ2q6oQKEZIkmJL/s400/romania+CA+deficit.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5319070828078071586" /></a><br /><br />National Bank of Romania Governor Mugur Isarescu is already expressing concern about the pace of the change, particularly because the fact that Romania's government was already operating with a fiscal deficit of around 5% of GDP in 2008, means that the ongoing contraction in private sector activity will need to be accompanied by a contraction in government spending too. Isarescu has been calling for "burden sharing" between the private and public sector, but with the IMF now in on the act, then it is pretty clear that the public sector will not be escaping its share of the pruning.<br /><br /><blockquote>"I said we have no alternative to adjusting the current account deficit. The entire program of economic policies, be it the former or the current government's, should be focused on this adjustment, that should not be made by the market forces only, since it will be a lot more painful," Isarescu noted.</blockquote><br /><br /><strong>Central Bank Keeps Interest Rates On Hold</strong><br /><br />Romania’s central bank kept the Monetary Policy Rate unchanged at 10 percent today. The rate is the highest in the European Union, but the central bank governor Mugur Isarescu said he is pinning his hopes on the International Monetary Fund bailout averting a deepening recession. Romania was awarded a 20 billion-euro financing package last week to help cover the financing needs of the current account and budget deficits. The first 5 billion euros is scheduled to arrive in May.<br /><br /><br />Global financial turmoil has weakened the leu by 12 percent against the euro and 26 percent against the dollar in the past year as investors pull out of riskier nations. The loan makes Romania the sixth country in eastern Europe to receive an international financing package as the region’s economies struggle with declining demand from the west and growing external deficits, since Hungary, Ukraine, Belarus, Latvia and Serbia have also received bailouts to help avoid defaults and aid banks. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0uNbAn-t7K5oqYdXOKXeWV-vnHXe0xhrbcbqVupCoKEDNW4rKG_-vJemgN80k0yytS-u8H_50z7c0nngronl503B-MdQH03QqJzDPfY0rH8SBzz2-dgGS37zmVK6TIUsKpTbnNug0lKEA/s1600-h/romania+interest+rates.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 246px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0uNbAn-t7K5oqYdXOKXeWV-vnHXe0xhrbcbqVupCoKEDNW4rKG_-vJemgN80k0yytS-u8H_50z7c0nngronl503B-MdQH03QqJzDPfY0rH8SBzz2-dgGS37zmVK6TIUsKpTbnNug0lKEA/s400/romania+interest+rates.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5319360897128699122" /></a><br /><br />The leu, which has weakened by 12 percent against the euro and 26 percent against the dollar in the past year has recently recovered to some extent from the very low levels hit in January. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHBSFOlTvdtOA3Pun7YnsyzeDNGZPWT5dKCI2qcy9uKadpAZpDDSyaUAeD5yxoKRtEsQ8NzBst04cC5oZ1BnXrI4382XadePdH-qJbDUhWOsDAkDLEqutXnBUYVcj_kZSJMVvEXRVBDj_A/s1600-h/ron+rates.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 184px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHBSFOlTvdtOA3Pun7YnsyzeDNGZPWT5dKCI2qcy9uKadpAZpDDSyaUAeD5yxoKRtEsQ8NzBst04cC5oZ1BnXrI4382XadePdH-qJbDUhWOsDAkDLEqutXnBUYVcj_kZSJMVvEXRVBDj_A/s400/ron+rates.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5320191010689439186" /></a><br /><br />Please Check Back Later. Post To Be Completed.Unknownnoreply@blogger.com6tag:blogger.com,1999:blog-918478938386753900.post-6346740876767141412009-03-04T11:53:00.000-08:002009-03-04T12:14:08.774-08:00How Not To Manage Eastern Europe's Financial Crisis (Part 1)<blockquote>"Saying that the situation is the same for all central and eastern European states, I don't see that......you cannot compare the dire situation in Hungary with that of other countries."<br />Angela Merkel, Brussels, Sunday</blockquote><br /><br /><blockquote>"Happy families are all alike; every unhappy family is unhappy in its own way"<br />Tolstoy</blockquote><br /><br /><blockquote>In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide “case-by-case” support. That means a slow dribble of funds, with no chance of reversing the downward spiral.<br />Paul Krugman</blockquote><br /><br />Bank regulators from Bulgaria, the Czech Republic, Poland, Romania and Slovakia met today and issued a joint statement, ostensibly to reduce the some of the impact of what they term "alarmist comments" from the Austrian government about how the regional banking system is now in such a precarious state that it requires urgent action at EU level to prevent meltdown. The Austrian government are, of course, concerned about the impact of any meltdown on their own banking system. The result of this "reassuring statement" can be seen in the chart below (10 years, HUF vs Euro).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjg55QQeexCeOOgz-7-iIznEoF1iCmt5sc7A428gLWzCdWVu9HR2yCsk8NC5HzARoHwjDAQj8pxaDwgVZpNwHNJWZBb6PkdPeThdctch6wecMIpVPG2R_p73F4uG2YC2EJz7ed3Xs840e5q/s1600-h/huf.png"><img id="BLOGGER_PHOTO_ID_5309399899386329666" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 310px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjg55QQeexCeOOgz-7-iIznEoF1iCmt5sc7A428gLWzCdWVu9HR2yCsk8NC5HzARoHwjDAQj8pxaDwgVZpNwHNJWZBb6PkdPeThdctch6wecMIpVPG2R_p73F4uG2YC2EJz7ed3Xs840e5q/s400/huf.png" border="0" /></a><br /><br />Within minutes of the joint statement Hungary's currency plummeted to an all-time low against the euro and to a 6.5-yr low versus the US dollar. In fact the HUF rapidly depreciated to 312 per euro from 307.50 before climbing back in later trading to 310. And the reason for this swift reaction? Hungary was not invited to join the statement. As the forint plunged, Hungary 's banking regulator hurriedly signed up to the statement, blaming the original omission on a communications mess-up, but the damage was already done. <br /><br /><blockquote>“Each of the CEE Member States has its own specific economic and financial situation and these countries do not constitute a homogenous region. It is thus important first to distinguish between the EU Member States and the non-EU countries and also to clarify issues specific to particular countries or particular banking groups." <br /><br />Well this just takes us back to Tolstoy, each of them have their own specific problems, but the underlying reality is that they all face problems, and are vulnerable, each in their own way.</blockquote><br /><br />Hungary's economic fundamentals are clearly much weaker than those to be found in the Czech Republic and Poland as things stand, but what about Bulgaria and Romania? And the Czech Republic and Poland are about to have a pretty hard time of it as a result of their export dependence on the West, and Poland has the unwinding of the zloty options scandal still to hit the front pages. So there is plenty of food for thought here before throwing Hungary to the wolves. A default in Hungary could very easily lead to contagion elsewhere, and then the impact in the West is very hard to foresee. We should not be playing round with lighted matches right next to our fireworks stock. "Hey, it's dark in here" and then "boom".<br /><br />Yesterday <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUb.IAK7Ei4Y">it was Latvia's turn</a>, and the cost of protecting against a Latvian default (Latvia is the first European Union member priced at so- called distressed levels) rose to a record following the announcement that the unemployement level rose from 8.3% in December to 9.5% in January, the highest level in nearly nine years. In fact credit-default swaps linked to Latvia increased nine basis points to an all-time high of 1,109 basis points, according to CMA Datavision in London. The cost is above the 1,000 level, breached last week, that investors consider distressed, and is now about 270 basis points above contracts linked to Lithuania, the next-highest EU member. <br /><br />So two countries are being systematically detached here - Latvia and Hungary - and statements by EU leaders are unwittingly aiding and abetting the process. But we should all remember, after they have eaten Latvia and Hungary for breakfast, the financial markets will undoubtedly chew on other luckless countries over lunch (Romania's Q4 GDP data <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUb.IAK7Ei4Y">was out today</a>, and it was a shocker, and <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKUsRZp5lJRM">S&P have already said</a> they are "closely monitoring" the situation), before perhaps moving on to bigger game for supper. <br /><br />And we should remember here, no one is too big to fall, and I have already been warning about the gravity of Germany's situation, with a rapidly ageing population, a hefty bank bailout of its own to swallow, and total export dependence for GDP growth. Final data from Markit economics out today showed that Germany's composite PMI fell to 36.3 in February from 38.0 in January. That was the lowest level registered since the series began in January 1998. And it means that the German economy - which is highly interlocked with the whole of Eastern Europe (Austria holds the finance and Germany the industrial exposure) - is certainly contracting more rapidly in the first quarter of this year than it was in the last quarter of 2008, and may well contract in whole year 2009 by something in the order of 5%. So maybe someone over there in Germany should be reading the poem you will see below aloud to "our Angela" right now (Oh, and if you don't speak German, <a href="http://en.wikipedia.org/wiki/First_they_came...">you can find a translation here</a>).<br /><br />Als die Nazis die Kommunisten holten,<br />habe ich geschwiegen;<br />ich war ja kein Kommunist. <br />Als sie die Sozialdemokraten einsperrten,<br />habe ich geschwiegen;<br />ich war ja kein Sozialdemokrat.<br /><br />Als sie die Gewerkschafter holten,<br />habe ich nicht protestiert;<br />ich war ja kein Gewerkschafter.<br /><br />Als sie die Juden holten,<br />habe ich geschwiegen;<br />ich war ja kein Jude.<br /><br />Als sie mich holten,<br />gab es keinen mehr, der protestieren konnte.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-17752295104445535032009-03-04T11:51:00.000-08:002009-03-04T12:14:49.423-08:00What Last Weekend's EU Summit Did And Did Not AchieveWell reading the press on Monday morning it would have been fairly easy to reach the conclusion that nothing really happened yesterday in Brussels, and that a great opportunity was lost. The latter may finally be true, but the former most certainly is not. <br /><br />Let's look first at what was not decided on Sunday. The leaders of the 27 member countries in the European Union most certainly did not vote to back a proposal from Hungarian Prime Minister Ferenc Gyurcsany for a 180-billion-euro ($228 billion) aid package for central and eastern Europe. They did not back it because it was not even seriously on the agenda at this point. These people move slowly and we need to talk them throught one step at a time. So what was on the agenda. EU bonds for one, and <a href="http://edwardhughtoo.blogspot.com/2009/02/let-east-into-eurozone-now.html">accelerated euro membership for the East for a second</a>. And once we have the EU bonds firmly in place, then that will be the time to decide how we might use the extra shooting power they will bring us (boosting the ECB balance sheet would be one serious option they should consider, see forthcoming post from me and Claus Vistesen). That is when the emergency blood transfusion Gyurcsany was rooting for might come into play, but on this, as on so many items, the details of how we do what we do as well as the "what we do" will become important, so the moves we do take need to be well thought out, and systematic, they need to get to the roots of the problem, and not simply respond to problems on a piecemeal, reactive basis.<br /><br />As<a href="http://krugman.blogs.nytimes.com/2009/03/02/failing-the-test/"> Paul Krugman puts it</a> "In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide “case-by-case” support. That means a slow dribble of funds, with no chance of reversing the downward spiral." Amen to that!<br /><br />But let's look at little bit deeper at what has been decided, or if you prefer, at what has been floated, and may be "decided" at the next meet up. Well for one, <a href="http://www.euronews.net/en/article/01/03/2009/eu-leaders-say-no-to-protectionism/">we have promised not to be protectionist</a>, and for another, The World Bank, The European Bank for Reconstruction and Development (EBRD) and The European Investment Bank (EIB) have launched a two-year plan to lend up to 24.5 billion euros ($31.2 billion) in Central and Eastern Europe. This sounds a bit like trying to drain an Ocean with a teaspoon, and it is, so predictably the financial markets were not too impressed, expecially when they learned that not much of what was promised was going to be new money (as opposed to theacceleration of existing commitments), and especially when we take this sum and compare it with the likely quantities which are needed to "take the bull by the horms". EBRD President Thomas Mirow (who is more likely to give a low side estimate than a high side one) recentlly told the French newspaper Le Figaro that in his view Eastern European banks could need some $150 billion in recapitalisation and $200 billion in refinancing to stave off the risk of a banking failure in the region. At least.<br /><br /><blockquote>"(It) sounds like a lot of money, but when (commercial) banks have lent Eastern Europe about 1.7 trillion dollars, 25 billion is peanuts," said Nigel Rendell, emerging markets strategist at Royal Bank of Canada in London. "Ultimately we will have to get a much bigger package and a coordinated response from the IMF, the European Union and maybe the G7."</blockquote><br /><br />So let's now move on to the positive side of the balance sheet, since as we know our leaders are a slowish bunch when it comes to grasping what is actually going on here, and an even slower group when it comes to acting on that knowledge once it has been acquired. The biggest plus to come out of last weekend's thrash is most definitely the fact that the idea of accelerating membership of the eurozone for the Eastern countries has now started to gain traction, if with no-one else then at least with Luxembourg Prime Minister (and Finance Minister, he is a busy man) Jean-Claude Juncker, aka "Mr Euro", who was <a href="http://www.reuters.com/article/GCA-Economy/idUSL154742720090301">quoted by Reuters</a> on his way into the meeting saying he did not expect any early change to accession criteria for the single currency.<br /><br /><blockquote>"I don't think we can change the accession criteria to the euro overnight. This is not feasible," Juncker told reporters as he arrived for a summit where non-euro eastern countries are due to call for accession procedures to be accelerated after their local currencies have taken a hammering on markets.</blockquote><br /><br />While in the news conference following the meeting <a href="http://www.reuters.com/article/companyNewsAndPR/idUSL166167620090301">he said that there was now a consensus</a> that the two-year stability test required for a currency of a country hoping to join the euro zone should be discussed. <br /><br /><blockquote>"I can understand that there may be a slight question mark over the condition that one needs to be member of the monetary system (ERM2) for two years, we will discuss this calmly," Juncker told a news conference after a meeting of EU leaders.<br /></blockquote><br /><br />So something actually went on during the meeting, even if we are largely left guessing about what. Angela Merkel also left a similar impression that movement was taking place. "There are requests to enter ERM 2 faster," Merkel is quoted as saying. "We can have a look at that."<br /><br />Now I have already spelt out at some length why I think the Eastern Countries should be offered accelerated membership of the eurozone forthwith (<a href="http://edwardhughtoo.blogspot.com/2009/02/let-east-into-eurozone-now.html">see this post</a>) as has Wolfgang Munchau (<a href="http://www.ft.com/cms/s/0/06a45f2a-0118-11de-8f6e-000077b07658.html">in this FT article here</a>). <br /><br />The Economist, <a href="http://www.economist.com/opinion/displaystory.cfm?story_id=13184655">in a relatively sensible leader</a> which I have already referred to, divides the Eastern countries into three groups. Firstly there are those countries that are a long way from joining the EU, such as Ukraine, Turkey and Serbia. As the Economist points out, while it would be foolhardy practically and hard-hearted ethically to simply stand back and watch, European institutions are pretty limited in what they can do apart from offereing some timely financial help or some sound institutional advice, and it is entirely appropriate that the main burden of pulling these countries back from the brink should fall on the International Monetary Fund. <br /><br />Then there are those East and Central European Countries who are themselves members of the Union, and here it is the EU that must take the leading role. A first group of these is constituted by the Baltic trio (Estonia, Latvia and Lithuania) and Bulgaria, who have currencies which are effectively tied to the euro, either through currency boards, or pegged exchange rates. Simply abandoning these pegs without euro support would both bankrupt the large chunks of their economies that have borrowed in euros and deal a huge psychological blow to public confidence in the whole idea of independent statehood. Yet devalue they must (either via internal deflation, or by an outright breaking of the peg) and either road is what Jimmy Cliff would have called a hard one to travel. As the Economist itself suggests, these countries have suffered the most painful part of being in the euro zone—the inability to devalue and regain competitiveness—without getting the most substantial benefits of participation, so although none of them will meet the Maastricht treaty’s criteria for euro entry any time soon (and since they are tiny - the Baltics have a population of barely 7m, and Bulgaria is hardly bigger), letting them directly adopt the euro ought not to set an unwelcome precedent for others and should certainly not damage confidence in the single currency (any more than it already is, that is).<br /><br />On the other hand unilateral adoption of the euro is a rather more difficult issue for the third group of countries, those who are EU members, are not in the eurozone and have floating exchange rates: the Czech Republic, Hungary, Poland and Romania. None of these is here and now, tomorrow, ready for the tough discipline of a single currency that rules out any future devaluation, and they are large enough collectively (around 80 million) that their premature entry could expose the euro to more turbulence than it already has on its plate. But so could simply leaving the situation as is, since if these economies enter a sharp contraction (more on this in a coming post) then the loan defaults are only going to present similar problems for the eurozone banking system as their currencies slide. The big vulnerability for Western Europe from the Polish, Hungarian and Romanian economies, arises from the large volume of Euro and CHF denominated debt taken on by firms and households, mainly from foreign-owned banks. As the Economist puts it "what once seemed a canny convergence play now looks like a barmy risk, for both the borrowers and the banks, chiefly Italian and Austrian, that lent to them".<br /><br />So we now have several EU leaders opening the door for the first time to the possibility of fast-track membership of the eurozone. As we have seen German Chancellor Angela Merkel said after the summit that we "could consider" accelerating the candidacy process, French President Nicolas Sarkozy said that "the debate is open", and Luxembourg Prime Minister Jean-Claude Juncker, who heads the Eurogroup of eurozone finance ministers, said he was willing "to calmly discuss" such a possibility. So the debate is open. When will the next meeting be? On Sunday I hope. A week in all this is a very long time for reflection in this hectic world. We need proposals, and concrete ones for how to move forward here. Especially since at the present time all our attentions seem to be focusing on the East, and there is also the South and the West (the UK and Ireland) to think about. Perhaps our leaders will be able to make time from their crowded agendas for a series of mid-week meetings on this topic.<br /><br />And while the leaders dither, the markets react, and <a href="http://www.bloomberg.com/apps/news?pid=20601083&sid=a12X2M5Abt2U&refer=currency">as Bloomberg reports</a> the dollar surges as everyone seeks a safe haven during the coming storm.<br /><br /><blockquote>The dollar rose to the highest level since April 2006 against the currencies of six major U.S. trading partners.... and .... The euro dropped to a one-week low against the greenback as European Union leaders vetoed Hungary’s proposal for 180 billion euros ($227 billion) of loans to former communist economies in eastern Europe. The Swedish krona fell to a record versus the euro on speculation the Baltic region’s borrowers may default, and the Hungarian forint and Polish zloty tumbled. <br /><br />The Hungarian forint led eastern European currencies lower today, falling 3.1 percent to 243.86, while Poland’s zloty lost 3 percent to 3.7796. The forint fell to a 6 1/2-year low of 246.32 on Feb. 17 as Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe. The zloty touched 3.9151 the next day, the weakest since May 2004. <br /><br />EU leaders spurned Hungary’s request for aid at a summit in Brussels yesterday. Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. </blockquote>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-34660611122166442272009-03-04T09:41:00.000-08:002009-03-30T09:42:26.810-07:00Is Romania Already Entering Recession?I don’t have a chart for this post, or anything of the kind, and the reason will become obvious in a minute. Romanian economic growth, the fastest in the European Union in the third quarter of 2008, slowed dramatically in the last quarter, coming in at an annual rate of 2.9 percent, the slowest in more than three years, and down (dramatically) from a revised 9.2 percent in the July-September period, according to data out today from the Bucharest-based National Statistics Institute.<br /><br />The point is, we have no idea at all of what the quarter on quarter rate of change is, since the data provided by the Romanian Statistics Office is among the worst in the EU, and more comparable to China than an EU state in this regard. We simply do not know at this point what is happening to the Romanian economy, at least in the sort of detail that matters. Not everyone is so happy to stay in complete ignorance however, and analysts at Raiffeisen Bank did do some calculating of their own. In a research note published on 27 February, they estimate likely fourth quarter growth at 3.5% and put this provisional number through their calculating machines. On this basis they come out with the incredible result that, on a seasonally adjusted basis, the Romanian economy may well have contracted by between 2 and 3 percent from one quarter to the next. This is a very large number, and implies the economy has entered tailspin, especially when we remember that the final result was 2.9 percent year on year (ie below the 3.5 percent number they were working with).<br /><br /><blockquote>The statistical office will release the GDP figures for Q4 2008 on 4 March. The GDP growth rate in Q4 2008 should be substantially below the levels in the previous quarters. Although GDP expanded by 9.1% yoy in Q3 2008, it may expand by just 3.5% yoy in Q4 2008 (in spite of the still large positive contribution from the agriculture). This is because the final months of 2008 were marked by a rapid deceleration of activity in all sectors of the economy (industry, construction, retail sales). In Q4 2008, industry plunged by 10.4% yoy, while the growth rate in the construction industry stood at 16.8% yoy, down from 28.5% yoy in Q3 2008. Also, the growth rate of retail sales decelerated only to 4.3% yoy in Q4 2008, from 17.4% yoy in Q3 2008. According to our estimations, the rapid deceleration in the annual GDP growth rate reflects a contraction in real GDP in Q4 2008 by 2-3% from Q3 2008 (based on seasonally adjusted data).</blockquote><br />Going on the data we do have consumption shrank 2.8 percent year on year, while financial activity fell 1.5 percent. Agricultural output, on the other hand, was up 18.2 percent, sustaining growth to some extent. The statistics institute said it will provide a more detailed breakdown of economic growth on March 19, but since Eurostat reports provide no harmonised Romanian GDP data in their quarterly reports, I am not optimistic.<br /><br />“I am worried,” Finance Minister Gheorghe Pogea told reporters in Bucharest today. “These are the initial effects of the crisis manifesting itself in Romania. I am thinking about how to compensate for this, to re-launch the economy. The amplitude of the slowdown is big.”<br /><br />Romania’s prior growth was based on a lending bubble. This has now burst. Private lending growth slowed to an annual 34 percent in January, down from over 63 percent in June as overdue debt payments more than tripled. Exports, which comprise almost a third of Romania’s gross domestic product, fell an annual 17 percent in December. So Romania’s economy is being hit on two fronts, exports are hit by economic contractions among its customers, while the credit crunch has put a sharp brake on domestic consumption.<br /><br />Since it is more or less certain that the Romanian economy contracted in the last quarter of 2008, and since it is more or less impossible that we see an expansion in the first quarter of this year, I would conclude that the Romanian economy has now entered recession.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-918478938386753900.post-44373616369898491532009-02-22T12:25:00.000-08:002009-02-22T12:28:05.691-08:00Let The East Into The Eurozone Now!<blockquote>“It’s 20 years after Europe was united in 1989 – what a tragedy if you allow Europe to split again.”<br />Robert Zoellick, World Bank president, <a href="http://www.ft.com/cms/s/0/942a7748-fe08-11dd-932e-000077b07658.html">in an interview with the Financial Times</a></blockquote><p><br /><br /></p><p><a href="http://www.ft.com/cms/3cf2381c-c064-11dd-9559-000077b07658.html?_i_referralObject=1038990522&fromSearch=n"><img id="BLOGGER_PHOTO_ID_5304411984088385666" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 300px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg810BbBJP8gTbTRprNiCoH_Nlzf9NFzM71B0To69k-wZOz21iJCagknWp-Al4n8NRlWLlhZxPRVDrzh9dOBlHmOw17Il39emO9yDy-OrZ9tBMrDlwdRP3A0WCh194aeUHIkLr2cxSQNwVU/s400/zoellick.png" border="0" /></a>(Click On Image To View Video)<br /><br />World Bank president, Robert Zoellick, made a call this week - <a href="http://www.ft.com/cms/s/0/942a7748-fe08-11dd-932e-000077b07658.html">in an interview with the Financial Times</a> - for a European Union-led and co-ordinated global support programme for the economies of Central and Eastern Europe. I agree wholeheartedly, and even if I have, reluctantly, to accept the point made last week by our <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqeHArjKaDKU">Economy & Finance Commissioner Joaquin Almunia</a> that our pockets, though deep, are certainly not bottomless (and thus it is probably beyond our means right now to rescue the non-EU Eastern states), I still feel we should make good on our responsibilities to those who are EU members, and to do so by opening the doors of the Eurozone to those who wish to join. Since this proposal is fairly radical, the justification that follows will be lengthy.<br /><br />This is not a view I have arrived at lightly, but looking at the extent of the problem we now have before us, a problem which is growing by the day, and taking into account the fact that the origins of the economic crisis in the East must surely rest (at least in part) in the decision to make euro participation a condition for EU membership for these countries (a possibility which was subsequently withdrawn in the critical moment, when the going started to turn rough), and then assessing the risk to the Western European banking system which would be posed by simply sitting back and watching it all happen, I think this move is not only the least damaging of the policies we can now follow, it is the in effect the only viable path left to us if we are to keep the eurozone as an integral entity together. <br /><br />If this proposal were accepted a new set of membership criteria would need to be drawn up, of course, but the underlying principle would have to be one of offering the certainty of entry as guaranteed forthwith, for those who chose to accept. Rules were made to be broken, and nothing should be so inflexible - not even the Maastricht eurozone membership criteria - that it cannot be ammended as circumstances dictate. And at this point even the undertaking that this - like the long awaited US Stimulus programme - was on the table, would be sufficient to provide immediate, and much needed relief. Flirting with doing nothing here is, in my opinion, flirting with disaster, both in the East and in the West.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZS5Z94Ujoub1vMoyipN7XpA6znqX0QnRF-kH_CVuYDrF72U1nY6gGqEmxDqCohyphenhyphenFwm90eCMXpAJPQb0BmxXTZ8Z7bfqO0Qx6bdjUdkHE0eod05lpZAEhmNt5Xqu-1wAEydbSa4cto3XmX/s1600-h/estonia+GDP.png"><img id="BLOGGER_PHOTO_ID_5302345217363916434" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 230px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZS5Z94Ujoub1vMoyipN7XpA6znqX0QnRF-kH_CVuYDrF72U1nY6gGqEmxDqCohyphenhyphenFwm90eCMXpAJPQb0BmxXTZ8Z7bfqO0Qx6bdjUdkHE0eod05lpZAEhmNt5Xqu-1wAEydbSa4cto3XmX/s400/estonia+GDP.png" border="0" /></a><br /><blockquote><strong>Existing Maastricht Criteria</strong><br /><br />Convergence criteria (also known as the Maastricht criteria) are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union (EMU) and adopt the euro. The four main criteria are based on Article 121(1) of the European Community Treaty. Those member countries who are to adopt the euro need to meet certain criteria.<br /><br />1. Inflation rate: No more than 1.5 percentage points higher than the three lowest inflation member states of the EU.<br /><br />2. Government finance:<br /><br />Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.<br /><br />Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.<br /><br />3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for 2 consecutive years and should not have devaluated its currency during the period.<br /><br />4. Long-term interest rates: The nominal long-term interest rate must not be more than two percentage points higher than in the three lowest inflation member states.</blockquote><p><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUnUR76T2th3ejWDjDxN1qjIPzPy2ifpGyBhiRrtj81WrK5y_AV2xcbK5eOCGT9eCiknQV7q1muvjcwGtDw_A8mlXzceeR-MSjzNeauwFhsiVpTL8-8W2ZJzS7anZu_xwXepxJajuXytv0/s1600-h/latvia+GDP.png"><img id="BLOGGER_PHOTO_ID_5300779209931148978" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 197px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUnUR76T2th3ejWDjDxN1qjIPzPy2ifpGyBhiRrtj81WrK5y_AV2xcbK5eOCGT9eCiknQV7q1muvjcwGtDw_A8mlXzceeR-MSjzNeauwFhsiVpTL8-8W2ZJzS7anZu_xwXepxJajuXytv0/s400/latvia+GDP.png" border="0" /></a><br /><br /><br /><br /><strong>The Dimensions Of The Problem</strong> <blockquote>European governments, the European Union and international financial organizations need to act fast on risks stemming form banks’ exposure in the eastern part of the continent to avert an escalation of the credit crisis, Nomura Holdings Inc. said. East European countries are struggling to refinance foreign- currency loans taken out by borrowers during years of prosperity through 2007, when economic growth averaged at more than 5 percent. The International Monetary Fund, which has bailed out Latvia, Hungary, Serbia, Ukraine and Belarus, warned on Jan. 28 that bank losses may widen as “shocks are transmitted between mature and emerging market banking systems.” “Swift action is needed to restore confidence and prevent trouble” to financial and economic stability in the euro region and emerging Europe, said Peter Attard Montalto, an emerging markets economist at Nomura International in London. “Any move should be quick. The situation has begun to decline more rapidly since the end of last year and there is risk that any action may come too late.”<br /><a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aWorLOzbbUog">Bloomberg </a></blockquote><p>Robert Zoellick is far from being a lone voice in the wilderness about the current level of risk to the coutries in the East, and indeed precisely those EU banks who have been most active in emerging Europe are now busily trying to convince EU regulators, the European Central Bank and Brussels itself to coordinate new measures to counter the impact of the financial crisis confronting the region. The problem in the East certainly now adds a new dimesion to the problems facing us here in Europe, since West European governments are now being simultaneously hit on a number of fronts, and the situation is become more complicated by the day.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmQWzZgy2A38AGHRXA3f8AvcbfYYXr8wWDfQTeEbTmSnu0iFVnjxAu4Yi3oQs5wydO1u2dh1B9zDxwzr6J1DvRaT_10YSpTnOMJ9E-THV86fOcSVvY6CtT1urTMplhL7uiLNt-mBn7Z1ce/s1600-h/hungary+gdp.png"><img id="BLOGGER_PHOTO_ID_5302361791829316002" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 199px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmQWzZgy2A38AGHRXA3f8AvcbfYYXr8wWDfQTeEbTmSnu0iFVnjxAu4Yi3oQs5wydO1u2dh1B9zDxwzr6J1DvRaT_10YSpTnOMJ9E-THV86fOcSVvY6CtT1urTMplhL7uiLNt-mBn7Z1ce/s400/hungary+gdp.png" border="0" /></a><br /><br /><br />In the first place most West European economies are now either in or near recession, and their domestic banking systems are, to either a greater or a lesser extent, struggling. The West European states are thus, by and large, already feeling stress on their own sovereign borrowing capacities. But, with greater or lesser effectiveness, these countries are still able to increase their debt, even if sometimes the surge in borrowing is very dramatic, as in the case of Ireland, which will see gross debt/GDP shooting up from 24.8% in 2007 to a projected 68.2% in 2010 (EU January 2009 Forecast).<br /> </p><p>The situation in Eastern Europe is very different, and their economies and credit ratings evidently can't support such dramatic increases in their debt levels. Thus, in the case of those countries with a significant home banking presence, like Latvia's Parex, or Hungary's OTP, the support of external organisations (the IMF, the World Bank, the EU) becomes rapidly necessary when the bank concerned starts to have liquidity problems. But as a result of the consequent bailout the debt to GDP ratio starts to rise in a way which then places even subsequent eurozone membership in jeopardy. Latvia's Debt/GDP is, for example set to rise from around 12% of GDP in 2007 to over 55% in 2010. With a 10% plus GDP contraction already in the works for 2009, it is clear that Latvia's debt to GDP will rise beyond the critical 60% level. Hungary's debt/GDP is already above, and rising. If we don't do something soon, these two countries at least are being launched off towards sovereign default.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVef1QvqhhMbrhNt4RQQ6GmN59-JorVl4piC7nUIWMxi5AXYeWsccVfs0lesW8zBdnXjEh9FxNMmOkiLEkEc5FXBY1aQjoCqCHSHBa8_Fxcpx9yYR2ceNfYo3lyzD7YX1V0iZgjuDvOYx7/s1600-h/czech+gdp.png"><img id="BLOGGER_PHOTO_ID_5302229044156442706" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 233px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVef1QvqhhMbrhNt4RQQ6GmN59-JorVl4piC7nUIWMxi5AXYeWsccVfs0lesW8zBdnXjEh9FxNMmOkiLEkEc5FXBY1aQjoCqCHSHBa8_Fxcpx9yYR2ceNfYo3lyzD7YX1V0iZgjuDvOYx7/s400/czech+gdp.png" border="0" /></a><br /><br /><br />But the other half of this particular and peculiar coin turns up again in a rather unexpected way, and that is in the form of those West European banks who have subsidiaries in CEE countries, and who find now themselves faced, not with bailouts, but with ever rising default rates. This difficulty evidently and inevitably then works its way back upstream to the parent bank, and to the home state national debt, as the bank almost inevitably needs to seek support from one West European government, or another (in fact Unicredit, which has difficulty getting money from an already cash-strapped Italian government is talking of applying for support from the Austrian government via its Austrian subsidiary).<br /><br />Austria is, in fact, a very good case in point here, since, as Finance Minister Josef Proell recently indicated, the country had some 230 billion euros of debt outstanding in Eastern Europe, equivalent to around 70 percent of Austria's GDP. The Austrian daily "Der Standard" have also reported the analysts view that a failure rate of 10 percent in Eastern Europe's debt repayments could lead to serious difficulties for Austria's financial sector. And this is no hypothetical "what if" type problem since the European Bank for Reconstruction and Development (EBRD) has estimated Eastern Europe's bad debts could go over 10 percent and could even reach 20 percent in the course of the current crisis. Underlining the mounting concern in Austria, Proell tried last week to convince EU finance ministers to provide 150 billion euros is support to CEE economies as a first step in trying to contain the growing wave of defaults.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxOreUKr0C5FkLfjdUD5dyUUKleNQabZF2vcgTkiqQWu5sXncWC8WPh6dP4QrlYWv2cI5vT5G6Rovrce9zaM2swvvoPbbvpS7VM7R2GDFlTOlelrVUpnWq_9XgpWwoOHnCxRf2HbE9oFA/s1600-h/poland+PMI.png"><img id="BLOGGER_PHOTO_ID_5298199285097795010" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 228px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxOreUKr0C5FkLfjdUD5dyUUKleNQabZF2vcgTkiqQWu5sXncWC8WPh6dP4QrlYWv2cI5vT5G6Rovrce9zaM2swvvoPbbvpS7VM7R2GDFlTOlelrVUpnWq_9XgpWwoOHnCxRf2HbE9oFA/s400/poland+PMI.png" border="0" /></a><br /><br />The total quantity of debt outstanding is hard to put a precise number on, but the Bank for International Settlements estimated that, as of last September, more than $1.25 trillion had been leant by eurozone banks, and if you add in U.K., Swedish and Swiss bank liabilities the number rises to $1.45 trillion.<br /><br />Western Europeean banks have a very important market share in the East, ranging from a low of 65 percent in Poland to almost 100 percent in the Czech Republic. This basically means two things, that the region's businesses and consumers are extraordinarily dependent on uninterrupted capital inflows from the West, and that some West European banking systems are extremely sensitive to rising default rates in the East. Of course the problem goes beyond the EU's borders, and while EU bank market shares in the Community of Independent States is rather less significant than in the EU12, due to the still substantial domestic ownership which exists there, exposure to defaults is not unimportant, especially in Ukraine, Kazakhstan and, of course, in Russia itself. Further, there is South East Europe to think about, and countries like Serbia and Croatia.</p><p><strong>Large Banks Take The Initiative<br /></strong><br />Getting near to desperation, some of the largest banks involved - Italy's UniCredit and Banca Intesa, Austria's Raiffeisen International and Erste Group Bank, France's Societe Generale and Belgium's KBC - have launched a common initiative to try to lobby for an EU wide solution to the problem.<br /><br />UniCredit is the largest lender in Poland and Bulgaria, while Erste is number one in Romania, Slovakia and the Czech Republic, with KBC occupying the position in Hungary, Intesa in Serbia, and Raiffeisen in Russia and Ukraine. Hungary's OTP Bank, emerging Europe's number 5 lender and the largest one in its home country, does not formally belong to the group. On the other hand OTP is actively looking for support.</p><blockquote>OTP Bank Nyrt., Hungary’s biggest bank, said it’s in talks over a “role” for the European Bank for Reconstruction and Development, as it announced a 97 percent drop in fourth-quarter profit and “substantial” job cuts. As well as a possible EBRD involvement, OTP may also seek funds from Hungary’s emergency loan package from the International Monetary Fund, the European Union and the World Bank to “better serve the economy,” Chairman and Chief Executive Officer Sandor Csanyi said at a press conference in Budapest today. “There’s a chance the EBRD will assume a role in OTP, but I must stress that we plan no issue of new shares,” he said. OTP “doesn’t need to be saved,” Csanyi added. </blockquote>Chancellor Angela Merkel, while expressing support for the bank initiative, has stopped short of offering concrete assistance or suggesting measures beyond those which are already in place. <p></p><blockquote>The president of the European Bank for Reconstruction and Development, Thomas Mirow, wrote in the Financial Times this week the bank proposals "deserve full support as a worsening crisis in emerging Europe will threaten Europe as a whole". </blockquote><p>The Austrian government has already announced it is trying to raise support for a general European Union initiative to rescue the region’s banking system. The government has set aside 100 billion euros in cash and guarantees to stabilise its banking sector. Next in line in terms of exposure are Italy ($232 billion), Germany ($230 billion) and France ($175 billion). </p><p>Unicredit is publicly rather dismissive of the problem (as can be seen from the slide below which from a presentation they gave earlier this week, please click on image to see better), but Italian investors are far from convinced by their arguments, as witnessed by the fact that their stock has plunged 41 percent this year, and by the fact that they were forced to sell 2.98 billion euros in 50 year bonds this week to shore up their Tier I capital after investors only bought about 4.6 million shares, or 0.48 percent, from their most recent rights offer. UniCredit, which said last month it is considering asking for government assistance, has also been disposing of assets to raise money and it plans to pay shareholders their dividends in yet more shares. Nationalisation of banks to supply credit lines to the private sector is one hypothesis currently being studied by Silvio Berlusconi, according to a <a href="http://www.ft.com/cms/s/0/f65b2672-feaa-11dd-b19a-000077b07658.html">Financial Times report this morning</a>.<br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhZ700Co9bUPACwujEkIWC7nKVnzhB232XeIQ_e9IP9nu_FzaWNyBsWbTCBp3fz7Td2yZNZtE4lzzTUhXBqKthAZyyggf3xUb_ROisLs_SKuYo2whTCaChsCb0wNo20MrO6NebYzPPvxHw/s1600-h/unicredit.png"><img id="BLOGGER_PHOTO_ID_5304498823480991026" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 299px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhZ700Co9bUPACwujEkIWC7nKVnzhB232XeIQ_e9IP9nu_FzaWNyBsWbTCBp3fz7Td2yZNZtE4lzzTUhXBqKthAZyyggf3xUb_ROisLs_SKuYo2whTCaChsCb0wNo20MrO6NebYzPPvxHw/s400/unicredit.png" border="0" /></a>(Click on image for better viewing)<br />The Austrian proposal includes funds from the European Investment Bank, the European Central Bank and the EU Cohesion Fund. The Austrian government has offered money of its own and has been urging Germany, France, Italy and Belgium as well as the EU itself to contribute. One feature, however, stands out in all of the proposals which have so far been advanced: they are loan based-support. What Soros calls the "tricky question" of fiscal allocation from Europe's richer member states has not so far been raised, but it will be, since it will have to be.</p><p>And of course, Austria's concern is far from being altruistic, as Austria's economy and sovereign debt stability depend on finding a solution. It is hardly surprising to learn that credit-default swaps linked to Austrian government debt soared this week - by 39 basis points to a record 225 - on concern the country will need to bail out the domestic banks itself as they report losses and writedowns linked to eastern European investments. Erste, which said last week that full-year profit probably slumped by almost 26 percent, is in talks with the government to get 2.7 billion euros ($3.4 billion) in state aid. RZB has asked for 1.75 billion euros.<br /><br />The European Central Bank on the other hand, seems reluctant to extend emergency financial help to crisis-hit countries beyond the 16-country eurozone. The ECB did not have “a mandate to be a regional United Nations agency”, Yves Mersch, governor of Luxembourg’s central bank, recently told the Financial Times. Such comments reveal the level of resistance which exists within the ECB’s 22-strong governing council to the idea of offering financial support to countries outside the zone.<br /><br />The ECB has so far offered loans to Hungary and Poland, but has attached what some consider to be excessively strong conditions on facilities allowing them to borrow up to 5billion and 10billion euros respectively. Mr Mersch, whose views are thought to be widely shared in the ECB, suggested the central bank was worried about setting precedents if it relaxed its stance on helping individual countries. While some euromembers might favour assisting nearby nations, “we must not forget that other people might be sensitive to different countries”. </p><p><strong>Who Bails Out The West European Banks In The East?</strong> </p><blockquote>Governments and EU officials are struggling to formulate a coherent response to the economic and financial turmoil that has started to engulf the eastern part of the old continent. EurActiv presents a round-up of national situations with contributions from its network. Leaders of EU countries from central and eastern Europe will meet on 1 March ahead of an extraordinary summit on the same day with the bloc's other members, it emerged on Thursday (19 January). Polish Prime Minister Donald Tusk has invited his counterparts from the Czech Republic, Slovakia, Slovenia, Romania, Bulgaria, Lithuania, Latvia and Estonia for the talks to ensure the 27-nation meeting on the financial crisis is not dominated by the interests of Western member states. <a href="http://www.euractiv.com/en/euro/eastern-eu-members-seek-shelter-economic-storm/article-179614">See full Euractiv article on background</a>.</blockquote><p><br /><br />The EU has so far provided emergency balance-of-payments assistance to two of the East European member states in difficulty - Hungary and Latvia, and EU ministers did agree in December to more than double the funding available for such emergency lending to 25 billion euros ( so far Hungary has been allocated 6.5 billion and Latvia 3.1 billion). It is also quite probable that such lending will now have to be extended to the two newest southeast European members, Romania and Bulgaria, since their ballooning current account deficits and dramatic credit crunches mean that they are steadily getting into more and more difficulty.<br /><br />The core of the problem is that the East European economies enjoyed strong credit driven booms, which fuelled higher than desireable inflation and lead to strong foreign exchange loan borrowing which simply bloated current account deficits. Now capital flows into emerging Europe have dried up as the global financial crisis has raised investors' risk aversion and prompted them to dump emerging market assets, leaving foreign-owned banks as the only source of loans for companies and consumers.<br /><br /><br />Italy's UniCredit, the biggest lender in emerging Europe, warned at the end of January that there was a clear risk of the global credit crunch gripping the region. UniCredit board member Erich Hampel stated at a Euromoney conference in Vienna that the bank was committed to fund its subsidiaries in the CEE countries and would continue to lend, but at the same time made absolutely clear that in order to do this his bank would need government support, whether from Austria, or Poland, or Italy itself. </p><blockquote>Hampel said Bank Austria would decide during the first quarter whether to tap the Austrian government's banking stability package for fresh equity. " he said. "Our budget is under discussion now and clearly assumes growth in lending and in funding to the East. "</blockquote><p>And according to a report from the Austrian central bank the fact that a relatively small number of Western European groups - including three Austrian ones - own most of the banks in Central and Eastern Europe means that there is the risk of a "domino effect", implying the crisis would spread quickly from one country to another. "How capital flows into (emerging Europe) will develop depends on the financial strength of the parent groups and of the sister banks, and on whether the parents are willing and able to fund their subsidiaries," the bank's half-yearly Financial Stability Report said. "The risks to refinancing are increased by the danger of a domino effect, because a large part of the foreign capital in many countries comes from a relatively small number of Western European banks," . <blockquote>"What we see is that the emerging European economies have lost all sources of funding but banking," said Deborah Revoltella, chief economist for central and eastern Europe of UniCredit, the region's biggest lender. The task to carry whole economies through a downturn comes at a time when parent banks already face a double challenge: a likely sharp rise in loan defaults at their eastern subsidiaries and more difficult and expensive refinancing for themselves. "The international banks cannot solve this situation," Revoltella said. "They can do their part, and it's fundamental that they do their part but we have to take care of the other sources of funding which are missing now."</blockquote>And it isn't only Austria who is worried, since Greek central bank governor George Provopoulos warned Greek banks only last Tuesday against transferring funds from the country's bank package to the Balkans, where they have invested heavily. <br /><br /><strong>Regional Risks</strong><br /><br /><blockquote>In our view GDP growth is like to be negative in all CEE countries this year. In those countries least affected by the crisis (i.e. Poland, the Czech Republic, Slovakia and Slovenia) GDP is like to drop at least 2-5%, while those countries worst affected (i.e. the Baltic States, Bulgaria, Romania and Ukraine) are likely to face double digit declines in GDP. In other words, in terms of expected output lost in the region this is as bad as or even worse than the Asian crisis of 1997-98.<br />Danskebank - CEE: This Looks Like Meltdown</blockquote><br /><br />The problem that the EU has in adressing the situation in the Eastern member states is that what we have on our hands is not only a banking crisis, there is also a strong credit crunch at work, one which is now having a severe impact on the real economies in the region. Most of the economies in the region are already in recession, and those that are not soon will be (I have intersperced a number of relevant graphs throughout this post which should give some general impression of what is happening). Thus these countries are all taking multiple hits at one and the same time.</p><p></p><p>1/ In the first place they have an economic contraction on their hands, in some cases becuase they are struggling with a steep decline of export demand from western Europe, in others because their externally financed credit boom has now come to a sharp and painful end. </p><p>2/. Most countries in the region have some form of foreign currency exposure, although at present this is largely household and corporate rather than sovereign. In a number of countries -notably Hungary, Romania, Bulgaria and the Baltics this is particularly onerous since most of the mortgages were taken out in euros or Swiss Francs, and the default risk is now rising as their economies either deflate (internal devaluation) or their currencies fall as part of the regional sell-off. The danger is that as the bailouts are implemented at local level this exposure is steadily transferred over to the sovereign level, creating a dangerous dynamic which can endanger future eurozone membership. States which default will be unlikely candidate members.</p><p>3/. These countries are also suffering the impact of significant asset writedowns, as those assets bought at very high prices during the boom - some at up to six times their book value - now have to be written down, further weighing on earnings and weakening financial and corporate balance sheets. </p><p>4/ Finally there is significant contagion risk. The comparatively small number of foreign lenders involved has lead IMF economists and the credit ratings agencies alike to repeatedly warn of how the risk that a seemingly isolated incident in one country may rapidly spread right across the region. </p><blockquote>"I don't think it's an exaggeration to say that the whole banking sector and financial system (in the region) rests on the response of parent banks," said Neil Shearing, economist at Capital Economics. "If they withdraw funding it's not very difficult to see how there would be a very severe financial crisis sweeping across the region, and the whole region en masse would have to go to the IMF," he said. </blockquote><p><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjylZE6XOmKjOFjcm0c-h8MywUjyUwSr8X_71Ixv-s4Ba8o7cpwCHR1yFViA89HbHF47KAomlxlTzg9tkhOyQ9Q7_7I-GYTBAtRL2h9kGAtTLvxlANyfs1aIf5lEuwNMaAy0BQ2LTiocprW/s1600-h/russia+gdp2.png"><img id="BLOGGER_PHOTO_ID_5299277342878981762" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjylZE6XOmKjOFjcm0c-h8MywUjyUwSr8X_71Ixv-s4Ba8o7cpwCHR1yFViA89HbHF47KAomlxlTzg9tkhOyQ9Q7_7I-GYTBAtRL2h9kGAtTLvxlANyfs1aIf5lEuwNMaAy0BQ2LTiocprW/s400/russia+gdp2.png" border="0" /></a><br /><br /><br />Governments in the region have already taken what measures they can. Most increased deposit guarantees from 20,000 to 50,000 euros following the EU October Paris meeting. Lithuania went further and upped the limit to 100,000 euros, while Slovakia, Slovenia and Hungary all now offer unlimited protection. But this begs the question, who guarantees the government guarantees in the event they are called on.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR2hBCV3YYwGQG98Do-Hr7QOmktYJTUvdhPHmeZuKW_AEFaOxB5rsCbYhToXyjk1Pt2zlXFzH3vSc3GiWs08SKDmSx42ti2qLFFobnxQy2Bjf1O5tQfePT14dxKnjHWdoMwy75ItsOYd-v/s1600-h/unicredit+2.png"><img id="BLOGGER_PHOTO_ID_5304499753970079250" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 300px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR2hBCV3YYwGQG98Do-Hr7QOmktYJTUvdhPHmeZuKW_AEFaOxB5rsCbYhToXyjk1Pt2zlXFzH3vSc3GiWs08SKDmSx42ti2qLFFobnxQy2Bjf1O5tQfePT14dxKnjHWdoMwy75ItsOYd-v/s400/unicredit+2.png" border="0" /></a><br /><br />So the problem has now become a very delicate one, since the banks want to maintain their presence in the region even while almost every factor imaginable is working against them. The latest such factor is the threat of credit downgrades for their core business in Western Europe, and Moody’s Investors Service warned only this week that some of Europe’s largest banks may be downgraded because of loans to eastern Europe, a warning which sent Italy's UniCredit to its lowest level in the Milan stock market in 12 years.<br /><br />Moody’s argues there will be “continuous downward rating pressure” in the region as a result of worsening asset quality and western banks’ reliance on short-term funding. UniCredit’s Bank Austria subsidiary earned almost half its pretax profit from eastern Europe in 2007, Raiffeisen International Bank-Holding almost 80 percent and Austria’s Erste Group Bank more than 60 percent, according to Moody’s.<br /><br /><blockquote>“The most risky parts of the western European banks’ businesses are in eastern Europe and when you decide to cut risks, you cut back on the most risky assets first,” Lars Christensen, an analyst at Danske Bank A/S in Copenhagen, said by telephone today. “This could add further risk in the region as the economies there may face large current account deficits if funding from western European banks is withdrawn.” </blockquote><br /><br />As a result last Tuesday we saw a surge in the cost of protecting bank bonds from default, lead by Raiffeisen International Bank-Holding and UniCredit. Credit-default swaps on Vienna-based Raiffeisen climbed 26 basis points to a record 369 and those for UniCredit soared 23 basis points to an all-time high of 213, according to data from CMA Datavision in London. Credit-default swaps on Erste increased 24.5 to 307, Paris- based Societe Generale rose 6 to 116 and KBC in Brussels was unchanged at 240, according to CMA prices.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1rzVwyKu0uS8K6KdFYFZ_1D0-cXYiaoMXvIQOZcJvN-HmxG3bbeUEcmqoP-TYO1nn8pVbeyvD6Y_AKvhkm1H3Eb-pDvTmvEkUVgCmiFB29cNGiZJ6y8j-brgo9STGcjhdfdhyD1qAXg1d/s1600-h/german+GDP.png"><img id="BLOGGER_PHOTO_ID_5302218929988632386" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 226px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1rzVwyKu0uS8K6KdFYFZ_1D0-cXYiaoMXvIQOZcJvN-HmxG3bbeUEcmqoP-TYO1nn8pVbeyvD6Y_AKvhkm1H3Eb-pDvTmvEkUVgCmiFB29cNGiZJ6y8j-brgo9STGcjhdfdhyD1qAXg1d/s400/german+GDP.png" border="0" /></a><br /><br /><blockquote>The rising cost of insuring against default by a “peripheral” European government is likely to weigh on the euro, according to Merrill Lynch & Co. “This remains an important background negative for the euro,” Steven Pearson, a strategist in London at Merrill Lynch, wrote in a note today. “European banking-sector exposure to Eastern Europe, often via foreign currency lending, is an additional euro negative story that is gaining air-time.” Emerging market central banks may move away from holding European government bonds in their reserves as widening yield spreads between debt of different euro-zone economies makes bonds more difficult to trade, Pearson said.</blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid73sz4xVgPaXqOz-mrYVjM170rUqCmjiaMVESnl6E7-fXPghuTwf3A5t4iBCOBpdCoWaLLiSz8n-SJndrtXOV4RBfma0ZKtUt7XvF4uEuUR1-qgcgx_c5THtbV9mh4oSvbk4vu6Zcc00X/s1600-h/ukraine+GDP.png"><img id="BLOGGER_PHOTO_ID_5304135300895076722" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 209px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid73sz4xVgPaXqOz-mrYVjM170rUqCmjiaMVESnl6E7-fXPghuTwf3A5t4iBCOBpdCoWaLLiSz8n-SJndrtXOV4RBfma0ZKtUt7XvF4uEuUR1-qgcgx_c5THtbV9mh4oSvbk4vu6Zcc00X/s400/ukraine+GDP.png" border="0" /></a><br /><br /><strong>So Why Would The Euro Help?</strong><br /><br />Well, in the first place, four of the Eastern economies - Bulgaria, Latvia, Lithuania and Estonia, are effectively stuck, since their currencies are pegged to the Euro. They are in the unenviable position of being stuck between the proverbial rock and the hard place. They are now faced with US depression type economic slumps, and massive internal wage and price deflation all at the same time. Would Euro membership help? Well lets look at what the IMF said in their most recent report on the stand-by loan arrangement for Latvia.<br /><br /><blockquote>Accelerated adoption of the euro at a depreciated exchange rate would deliver most of the benefits of widening the bands, but with fewer drawbacks. Unlike all other options for changing the exchange rate, the new (euro-entry) parity would not be subject to speculation.<br /><br />By providing a stable nominal anchor and removing currency risk, euroization would boost confidence and be associated with less of an output decline than other options.Euroization with EU and ECB concurrence would also help address liquidity strains in the banking system. If Latvian banks could access ECB facilities, then those that are both solvent and hold adequate collateral could access sufficient liquidity. The increase in confidence should dampen concerns of resident depositors and also help stem non resident deposit outflows.<br /><br />However, this policy option would not address solvency concerns and has been ruled out by the European authorities. If combined with a large upfront devaluation, there would be an immediate deterioration in private-sector solvency, which could slow recovery. Privatesector debt restructuring would likely be necessary. Finally, the European Union strongly objects to accelerated euro adoption, as this would be inconsistent with treaty obligations of member governments, so this option is infeasible. </blockquote><br /><br />Basically, devaluating the Lat and entering the euro directly was the IMF's preferred option for Latvia, "euroization with EU and ECB concurrence" was the second option, and keeping the peg and implementing massive internal deflation only the third. The problem was that the EU, in its wisdom felt euro adoption "would be inconsistent with treaty obligations of member governments" - as would I suppose bailing out Austria and Ireland be "inconsistent with treaty obligations of member governments under the Maastricht Treaty. Go tell it to the marines, is what I say!<br /><br />And this is not just Latvia, but four entire countries (little ones, but still countries) that are effectively being thrown to the wolves here.<br /><br /><strong>Downward Pressure On Currencies, Upward Pressure On Interest Rates</strong><br /><br />Nor is the position of those with floating currencies - Poland, Hungary, the Czech Republic and Romania - much better, since their currencies are now coming under substantial pressure, and as a result defaults are growing, defaults which will only work their way back upstream to the Western Countries whose banks will have to stand the losses.<br /><br /><blockquote>At the same time, the risk of a sharper, 1997 Asian-style adjustment cannot be excluded, given the similarities between Asia before the eruption of the crisis there in 1997 and the situation in emerging Europe. Beyond any considerations about valuation, the FX market may overreact as it did during the Asian or Russian crises in 1997 & 1998. To halt the downward spiral of currency depreciation, a substantial rise in interest rates combined with a tight fiscal policy under an IMF programme could be necessary.<br />Murat Toprak & Gaelle Blanchard, Societe Generale</blockquote><br /><br />Obviously there is now a sense of urgency here, and the warning signs are everywhere, for those who know how to read them. According to Zbigniew Chlebowski, the chairman for the Polish ruling party’s parliamentary group speaking in an interview earlier this week, the Polish government has been in official talks with the European Central Bank over joining the pre-euro exchange-rate mechanism “for several days.” So consultations are getting to be fast and furious. <br /><br />And Hungarian, Polish and Czech government debt, which has been among the highest rated in emerging markets, is now being downgraded by bondholders. Investors are currently demanding 20 basis points more yield to own Hungary’s bonds than similar-maturity Brazilian debt, which is rated four levels lower by Moody’s Investors Service, according JPMorgan bond indexes. The risk of Poland defaulting is currently running at about the same as Serbia, ranked six levels lower by Standard & Poor’s, based on credit-default swap prices, while Czech 10-year bonds yield the most compared with German bunds since 2001.<br /><br /><blockquote>“Everybody is running for the door,” said Lars Christensen, head of emerging-market strategy at Danske Bank A/S in Copenhagen. “The markets have decided the central and eastern European region is the subprime area of Europe.”</blockquote> <br /><br />The currencies of these currenciies are tumbling on investor concern the region’s economies are among the most vulnerable to the global credit crisis. Poland’s zloty has fallen 35 percent against the euro since August, the forint - which has fallen around 13% since the start of the year, and about 25% since last August -weakened to a record low of 309.71 this week. At the same time the Koruna hit the lowest level since 2005. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaxGvdhxxaAc9XEY8arhBnPR9zGs_BR1hzn5vUrydKcqXZK-_CCnhsv2V0vdQecFIHMayr1d9_yc2GZG2hbJPWHjtaIPUoSJxuDHBz4xsbUoI0LB55u4wksALjfXQWfy0sdeNDbRu-wxQW/s1600-h/zloty.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 256px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaxGvdhxxaAc9XEY8arhBnPR9zGs_BR1hzn5vUrydKcqXZK-_CCnhsv2V0vdQecFIHMayr1d9_yc2GZG2hbJPWHjtaIPUoSJxuDHBz4xsbUoI0LB55u4wksALjfXQWfy0sdeNDbRu-wxQW/s400/zloty.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5304968505694236482" /></a>(Chart above - Polish Zloty vs Euro)<br /><br /><br />The zloty has risen - against the previous trend - by 3.2 percent this week, following a decision by the Finance Ministry to enter the market (on Wednesday) and started selling euros from European Union funds for zlotys. Prime Minister Donald Tusk said yesterday the currency must be defended “at any cost.” The Czech central bank stated it regards the buying and selling currencies to manage the koruna as an “exceptional” tool that it’s resisted using since 2002, with the implication that it may not be able to resist much longer, although interest rate hikes (as practised in Hungary) seem to be the more likely approach in the Czech Republic. Such gains as have been obtained for the zloty are likely to be short lived (intervention is a tool of desperation, not of strength, and rarely has any lasting effect) and they can hardly exhaust EU funding they badly need to spend on stimulus type projects in the face of the downturn defending the indefensible, as Russia has been learning to its cost in another context.<br /><br /><blockquote>“It [currency intervention ]is for us an exceptional tool at our disposal,” Tomas Holub, head of its monetary policy department, said in a telephone interview today. “Of course it’s one of the potential tools, but so far no decision has been taken in this direction.” </blockquote><br /><br />After intervention the only real tool left is interest rate policy, and fear of further currency falls is now acting as a serious brake on monetary policy as the pace of economic contraction gathers speed in one country after another. “A lowering of interest rates at the current levels of the exchange rate is completely out of the debate,” Deputy Governor Miroslav Singer told E15 newspaper earlier this week. “The question is whether to raise, and by how much.” <br /><br />Really the suggestion that all these countries simply traipse off to the IMF (one after the other) in search of help is shameful. There is simply no other word for it, shameful. As Oscar Wilde put it, losing one child may be an accident, but losing all your children, now that has to be negligence! Let them in, and let them in now, before the whole house of cards collapses on top of each and every one of us.<br /><br /><strong>Postcript</strong><br /><br />This article is the second in a series of five I am in the process of writing on ways forward with Europe's financial and economic crisis.<br /><br />The first was <a href="http://globaleconomydoesmatter.blogspot.com/2009/02/eu-bonds-story-rumbles-on.html">Why We Need EU Bonds</a>. <br /><br />Subsequent articles will deal with:<br /><br />a) The need for Quantitative Easing In The Eurozone<br />b) What might a new Stability and Growth Pact look like?<br />c) Why as well as rewriting the banking regulations we also need to do something about Europe's demographic imbalances.<br /><br /><strong>Update: The Danskebank View</strong><br /><br />With <a href="http://danskeanalyse.danskebank.dk/abo/NewEuropeWeeklyWeek9200209/$file/NewEuropeWeeklyWeek9_200209.pdf">which I wholeheartedly agree</a>.<br /><br /><blockquote>This week the crisis in the CEE markets has intensified dramatically after the publication of a number of reports putting a negative focus on Western European banks exposure to the overly leveraged CEE economies. The crisis is clearly developing in an explosive fashion and there is a very clear risk of an Asian crisis style meltdown. The economies in the region are already in free fall, and at least one country Ukraine is dangerously close to sovereign default. Rapidly rising concerns have led policy makers across Europe to call for immediate action to avoid a dangerous collapse that potentially could spill into the euro zone. However, policy makers seem very divided on what to do in the current situation.<br /><br />Earlier this week Lithuanian Prime Minister Andrius Kubilius called for coordinated action from the EU to try to solve the problems in CEE. Later in the week the World Banks president Robert Zoellick echoed Kubilius cry for help.<br /><br />However, the EU Commission does not seem very excited about a coordinated effort to avoid meltdown. Rather Joaquín Almunia, EU monetary affairs commissioner, this week said that he would prefer a country-by-country approach to crisis management. In our view, a country-by-country approach to crisis management entails a number of risks, as there is a strong potential for contagion from one CEE country to another due to the significant integration in the financial sector across the region. Therefore, we think that there is urgent need for a more coordinated effort to stabilise the situation otherwise this crisis will drag out and uncertainty remain elevated for an extended period.</blockquote>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-72132383092481287872008-12-16T08:10:00.000-08:002008-12-16T08:37:23.880-08:00Romania Accepts Budget Deficit Exceed 3% GDP, Industrial Output Falls SharplyRomania’s premier-designate Emil Boc admitted today that the 2008 budget gap may exceed the European Union limit of 3 percent of gross domestic product. <br /><br /><blockquote>“Our budget deficit stands between 3.5 percent and 4 percent of GDP this year, we’re outside the EU treaty,” Boc, who was nominated yesterday to be prime minister, said in Bucharest today. </blockquote><br /><br />The outgoing government had previously targeted a shortfall of 2.3 percent of GDP this year and 2 percent next year. The EU stability and growth pact requires governments to keep their budget deficits below 3 percent of GDP, and provides for financial penalties for countries that breach the ceiling. Even if the policy is likely to be flexibilised in 2009 given the severity of the economic slowdown, this stance is hardly applicable to the Romanian case, since the economy was in effect booming during most of 2008, and the bubble only finally burst during the financial crisis of October.<br /><br />The spending program of the new government, which was published today by Romanian newswire Mediafax, includes plans to reduce spending next year to narrow the budget deficit to 2.5 percent, but we will see if this move is now enough to satisfy officials in Brussels and analysts at the credit ratings agencies. Romanian sovereign debt was effectively lowered to junk bond status by Standard and Poor's last month, and there is of course no possibility of euro membership with such a rating.<br /><br /><br />The draft also includes a 45 percent pension increase and an increase in the minimum wage to 600 lei ($208) from 540 lei as of Jan. 1, a reduction of the value added tax for staple foods, infrastructure investments and incentives to companies to stimulate growth and create jobs. Contrarian voices were thus not hard to find and Varujan Vosganian, the outgoing Liberal finance minister, told Realitatea TV in an interview today that the measures included in the working draft will push the budget deficit to 6 percent of GDP next year. <br /><br /><br /><br />The Liberal Democrats and the Social Democrats, who formed a governing coalition with a two-thirds parliament majority on Dec. 14, also agreed to keep a 16 percent flat tax over the next years. <br /><br /><strong>Industrial Output Falls Back Sharply In October</strong><br /><br /><br />More evidence that a major contraction of economic activity is now underway in Romania came in today with the publication by Eurostat of the harmonised industrial output data for October. Output in Romania fell a seasonally adjusted 3.4% from September, and 3.2% from October 2007. In fact the rate of expansion in Romanian industry has been slowing since the spring, and as you can see in the chart below we are simply moving over to negative readings on a year on year basis. Still this data will now start to give us a nice handle on the actual rate of contraction as it takes place.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyx-wYh5wBsVByRbxv_i_MYZbGYInxMzam5_KFwzg31wYJWvXUWHjsS-szmy2hjTCZYIikiGKzkgbAoyez0wvOgo4UfP7EBQUNLgCOYvP0zV5MI-4LlPlhQ73JjOb1Vu-o0tzU3xJOXA-C/s1600-h/romania+IP.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 178px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyx-wYh5wBsVByRbxv_i_MYZbGYInxMzam5_KFwzg31wYJWvXUWHjsS-szmy2hjTCZYIikiGKzkgbAoyez0wvOgo4UfP7EBQUNLgCOYvP0zV5MI-4LlPlhQ73JjOb1Vu-o0tzU3xJOXA-C/s320/romania+IP.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5280422972956679202" /></a><br /><br /><br /><strong>The Leu Being Dragged Down By The Zloty</strong><br /><br /><br />Poland's currency is falling very sharply at the moment, as the slowdown in Western Europe reduces demand for its industrial products and an internal credit crunch slows down domestic demand. The zloty had its biggest intra-day drop in a month today, falling to its lowest level in more than two years, amidgrowing concern the economic slowdown is worsening. The zloty was down as much as 2.5 percent at one point, falling to 4.0812 per euro, its weakest level since July 10 2006, and passing through the psychologically important 4 per euro level. The zloty has been the worst performer over the last month among regional peer currencies when compared with the euro. <br /><br />The Romanian leu fell today to 3.9462 per euro from 3.9426 late yesterday, while the Hungarian forint dropped 0.2 percent to 268.34.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-5303492201537749692008-12-06T03:48:00.000-08:002008-12-07T03:07:25.437-08:00Romania's Economy Heads Off Quietly And With No Fanfares Into It's Deepest Crisis in a DecadeBefore I go any further, let me first apologise to any regular readers this blog may still have. <a href="http://en.wikipedia.org/wiki/When_Father_Was_Away_on_Business">Daddy has been very much away on business</a> I'm afraid, and for far too long. What with all the things that have been happening out there, I just haven't had the time to put pen (or my thoughts) to paper on Romania. This absence has been doubly regretted by me at least, since while I think the economic outcome of Romania's boom-bust cycle is unfortunately all too predictable, we are still sitting in the waiting room, and the emergency dentist (which in this case will probably be the IMF) will only be able to get to grips with the patient when the root problem afflicting the tooth becomes more apparent (and simply unbearable), and at this point we are still some way little way off from that stage. Meanwhile we simply apply the antibiotics and the anti-inflamatories, in order to calm the troubled nerve as best we are able.<br /><br /><br />Controversy surrounding the Romanian economy is nothing new, nor, as <a href="http://globaleconomydoesmatter.blogspot.com/2008/11/romania-votes-under-new-electoral.html">Manuel points out in his post on the recent election</a>, are Romanian politics strangers to tumult. Nonetheless the intensity of controversy has grown considerably of late, with a wide variety of assessments being offered concerning the likely impact of the intensifying international credit crisis on the short to medium term outlook for the Romanian economy. National Bank of Romania (NBR) governor, Mugur Isarescu, has been consistently arguing that the country should be able to avoid an excessively "hard landing"as the bank attempts to cool its evidently overheated economy and engages of fire-extinguising activities in the banking sector trying to control the impact of set of adverse external circumstances that are largely beyond its control. But most of these comments (or at least the more convincing ones) preceded the meltdown in the international financial markets which followed the Lehman Brothers bankruptcy, the fallout from which has surely had a strong negative impact on Romania's economy and greatly complicated the task of conducting macroeconomic policy which faces the new government to be be formed following last weekends elections.<br /><br />The other complicating factor has been the "own goal" scored recently by the Romanian political process, with one politician after another proposing fiscal deficit raising policies, at just a time when the international financial markets have become extremely sensitive to just this development in countries which are, due to their large current account deficits, mainly dependent on external borrowing to finance their lending needs. The accommodative fiscal policy being run by the Romanian government has also been extremely ill advised at a time when the central bank was busy trying to cool overheating by applying a restrictive monetary policy. For policy to be coherent, the two main levers need to be operated in tandem, and not at cross purposes.<br /><br />However, despite all odds, Romania has been hanging on in there, and GDP remained strong in the third quarter, a situation which has lead some commentators to use the term "gravity defiers" to describe those East European economies, like Romania and Bulgaria, that have so far avoided having a sharp adjustment, despite having evidently unsound macroeconomic fundamentals, and in particular unsustainably large external deficits.<br /><br />Not everyone has been convinced by the positive posture being assumed from within Romania, however, and Fitch Ratings agency had already downgraded Romania's outlook (together with that of the Baltic states and Bulgaria) from stable to negative by August pointing out in the process that the economy was extremely vulnerable to external financial pressure. This association of Romania with the Baltics is not incidental, since the Baltic economies were until only very recently - as Romania is now - the fastest growing in the European Union (with rapid credit expansion and large current-account deficit, sound familiar) but have subsequently experienced a very sharp growth slowdown following a sharp tightening in domestic credit demand and a dropping-off of external demand after high internal inflation fuelled by very large annual wage rises destroyed competitiveness. Indeed both Latvia and Estonia are now in deep recession, and have moved in a matter of months from being the EU's fastest growing to being the EU's most rapidly contracting economies. This is precisely what the expression "boom-bust" really means.<br /><br />The million dollar question at this point is whether or not the Romanian economy is destined to follow along the same path. In the analysis that follows I will basically be arguing that this is exactly where the Romanian economy is now headed. Some evidence to back the view can be seen in the latest reading on the EU economic confidence indicator (see below) which after months of trending slowly and steadily downwards suddenly lurched sharply south in October and November. Another detail which we would do well to bear in mind is that after many months of consecutive rises, seasonally adjusted retail sales <strong>fell</strong> in Romania (by 2.1%) in October over September. Indeed a growing quantity of anecdotal evidence now suggests that something important changed in Romania in October, even if we may yet need to wait several months to see the in the cold clear light of day the actual consequences of what happened. Another signal we have is that all is not exactly well, is that the number of newly-established companies increased only 0.7 percent in the year up to mid-November when compared with the same period last year, while bankruptcies soared according to the latest data from the Trade Registry Office (ONRC) - and in fact October was the month with most cases of insolvency, up a whopping 79 percent over October last year. In addition Romania's banks experienced a sharp liquidity crisis in mid October (see more below) and needed to borrow a total 49 billion lei (13 billion euros) in October from the central bank (using its lombard credit facility). This is 28 times the total amount borrowed between January and September 2008, according to NBR data. Banks only borrowed 20 million lei in lombard credits in September, while the total value of the loans issued was 1.75 billion lei between January and September.<br /><br /><br /><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4YXA4xujd-0IbQ7Uz2prYkd52AGek4HseQMLFK_Cz5hISHwAHOFoaMIK-jCoLuOalG4eA_2RQbh5F4EMtFRFD9nLuAkRlT1UEqaCQLbWGeBNIOoHP4QM_QBFaZHU7dBSAgcFJVlTqi9AK/s1600-h/eu+sentiment+romania.png"><img id="BLOGGER_PHOTO_ID_5274851329060942498" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 189px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4YXA4xujd-0IbQ7Uz2prYkd52AGek4HseQMLFK_Cz5hISHwAHOFoaMIK-jCoLuOalG4eA_2RQbh5F4EMtFRFD9nLuAkRlT1UEqaCQLbWGeBNIOoHP4QM_QBFaZHU7dBSAgcFJVlTqi9AK/s320/eu+sentiment+romania.png" border="0" /></a><br /><br /><strong>Events Take Their Course</strong><br /><br /><br /><blockquote>A capital-inflow-driven absorption boom has underpinned rapid catch-up growth but also fuelled macroeconomic imbalances. In particular, the external current-account deficit has risen to unsustainable levels. And, since mid-2007, headline CPI inflation has surged well above the central bank’s target, in part reflecting the firstround effects of food and energy price shocks. Rapid credit growth has raised risks to financial stability, although the largely foreign-owned banking system remains wellplaced to absorb shocks. In this setting, fiscal policy has been highly procyclical and lacked medium-term orientation.<br />IMF Article IV Consultation, July 2008</blockquote><p><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1G18EpiOK1fLgknu2r57gsJr4oSZp8snnWGK74jhCuf0l4ewGvdnUv5iF-EZYhZXChYQsGrijnLEUjjnnv5LSQx4TBI9yXc5QD1iJ4FfMrqnsVNFfK_L5_DeipICySI5SQksNzegfSPIA/s1600-h/romania+ca+deficit.png"><img id="BLOGGER_PHOTO_ID_5274853306886266786" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 194px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1G18EpiOK1fLgknu2r57gsJr4oSZp8snnWGK74jhCuf0l4ewGvdnUv5iF-EZYhZXChYQsGrijnLEUjjnnv5LSQx4TBI9yXc5QD1iJ4FfMrqnsVNFfK_L5_DeipICySI5SQksNzegfSPIA/s320/romania+ca+deficit.png" border="0" /></a> The IMF quote above basically spells out the general understanding economists have of what has been happening in Romania. Real GDP growth has been robust,but has increasingly been running up against capacity bottlenecks. Largescale emigration, notably to Italy and Spain, and high demand for workers, especially in construction, have resulted in tight labor market conditions. As a result, real wage growth has outpaced productivity growth, with buoyant public-sector wages adding to private-sector wage pressures. With core inflation under pressure, headline inflation has surged, partly owing to the firstround effects of shocks to energy and food prices, and to some extent reflecting the 2007 drought. However the initial shock has evidently moved over into second round effects, and price setters, faced with higher unit labor and other input costs, have been struggling to maintain their markups, as also indicated by surging producer-price inflation. </p><p>It is in this context that the fact that fiscal policy stance in 2007 was highly procyclical becomes a problem. The fiscal deficit increased in 2007 to 2.25 percent of GDP, up from 0.5 percent of GDP in 2006. Adjusted for the automatic effects of the booming economy on the fiscal position, the IMF estimated that the 2007 structural deficit rose to almost 4 percent of GDP. As a result, the fiscal stance was highly expansionary, adding an estimated net fiscal stimulus of 2 percent of GDP to an already overheating economy. Thus the Romanian economy was simply booming along just waiting for something unfortunate to happen, and, of course, true to form and as was to be expected, it eventually did.<br /><br /><strong>Octobers "Sudden-Stop" Credit Crunch</strong><br /><br />Bank lending seems to have ground to a virtual halt in Romania in mid October (and October is the latest month for which we have statistics from the National Bank of Romania). After rising at a monthy rate of 4% (or a 50% annual rate) in September, total lending to households and non financial corporations actually <strong>fell</strong> in October (when compared with September) by 0.6%. For an economy which has been experiencing a debt driven consumer and construction boom it is hard to overstate the significance of this single fact. We seem to have what is known as a "sudden stop" in aggregate bank lending here, and the Romanian economy may now well fall rapidly into recession, following the tried and tested path so recently pioneered by Latvia and Estonia.<br /><br />While RON denominated lending continued to advance slightly, the largest hit appears to be being taken - not really surprisingly - by forex loans, which fell in total by 1.5% in total month on month (-1.9% corporates, -1.2% households). Given that the RON strengthened slightly against the euro during the month the decline was probably less than it appears (since the book value in RON of forex loans falls when the Leu strengthens - and vice versa - and this revaluation is of course the great danger represented by a sudden Leu slide, since not only will the monthly payments on the mortgages shoot up, so too will the capital value of the outstanding mortgage, as anyone unfortunate enough to have taken out a loan in Japanese Yen, or CHF, surely already knows to their cost). But basically, since the currency fluctuated wildly but was actually up against the euro by 1.5% in October, we really do need to wait till we get to see what happened in November to have a clearer picture.<br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisaueGBVf21GX8xQdiYxF_ero2s3uJBKkfyP4xOihjXVRDCLYlQKPrPUVdbGqbX-RAksDi_XL7yG6FOHTpMiCiByXoVVEJev02iabC__EaCDmz62GhdWmcTHLR9j4OW9kRrmtAbMyU8sul/s1600-h/romania+lending+2.png"><img id="BLOGGER_PHOTO_ID_5274849718166133154" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 172px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisaueGBVf21GX8xQdiYxF_ero2s3uJBKkfyP4xOihjXVRDCLYlQKPrPUVdbGqbX-RAksDi_XL7yG6FOHTpMiCiByXoVVEJev02iabC__EaCDmz62GhdWmcTHLR9j4OW9kRrmtAbMyU8sul/s320/romania+lending+2.png" border="0" /></a><br /><br />However, if we look back over the two months of September and October (where the currency fluctuations to some extent cancel each other out, but that overall the leu weakened 4.5% against the euro) then it is clear there has been a sharp slowdown in forex lending, and the effects of this slowdown will gradually be felt over the next six to nine months. Well, gradually or not so gradually, since new car sales (which obviously normally need finance) fell by nearly 30% year on year in October (to 20,478 from 29,347 a year earlier), according to the latest data from the Romanian Association of Automobile Producers & Importers. Basically if we look at the pattern which we can see in other economies which have been affected by the credit crunch, what started off as a slowdown in demand for cars as oil prices rose "transited" to an inability to finance purchases as oil prices fell back again. Hence the current difficulties of motor industry "majors" like Ford and General Motors.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVIGnlGipUwB2fOPfa97VU_cdf6f7UE2vD9HBhD0fMeXXXXpEekx2COHnYiYcnrdtN0Cm0EeuwCAdZf_GQ1am_b_iwF7q7gdvopbrU5Qbun1x48WyDnwrlOMsvVAbsQk2qiT_TR855n2g1/s1600-h/romania+household+credit.png"><img id="BLOGGER_PHOTO_ID_5274849048531746562" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 154px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVIGnlGipUwB2fOPfa97VU_cdf6f7UE2vD9HBhD0fMeXXXXpEekx2COHnYiYcnrdtN0Cm0EeuwCAdZf_GQ1am_b_iwF7q7gdvopbrU5Qbun1x48WyDnwrlOMsvVAbsQk2qiT_TR855n2g1/s320/romania+household+credit.png" border="0" /></a><br /><br /><strong>Fiscal Deficit Issues</strong></p><p>Another area of concern has been Romania's budget deficit, which stood at 2.4% in 2007, and is expected to widen in 2008 and 2009 . A number of factors are contributing to this steady deterioration:<br /><br />1) the rising cost of government borrowing;<br />2) forecasts of a sharp decline in GDP growth for 2009<br />3) enactment of spending pledges made by candidates ahead of Nov-08 elections<br /><br /><br />Romania's loose fiscal policy stance and the growing public spending commitments were among the key reasons cited by credit ratings agencies for the recent downgrades in Romanian debt to what is effectively 'junk' status. Indeed Finance Minister Varujan Vosganian recently estimated that spending increases authorised by parliament before last weeks elections could widen the budget deficit considerably beyond the EU’s 3% of GDP limit, and some estimates suggest that, on a worst case scenario, it could possibly even amount to as much as 7% of GDP in 2009. </p><p>Indeed it looks as if the deficit could even pass the 3% level in 2008 (the year of such a rapid expansion, there is surely no excuse for this) since the 11 month budget deficit widened to 2.9% of GDP following a sharp drop in budget revenues over the last two months according to Varujan Vosganian last week. Vosganian told a press conference that budget revenues in October and November were 1.3 billion euros below the projected level.<br /><br />Perhaps the highest profile decision in the context of the recent Romanian fiscal deficit "cause celebre" was the one taken on 8 October by the Romanian Parliament, when it agreed to a pay rise for teachers which was calculated to be in the region of 50%, and this against the explicit wishes of Calin Popescu Tariceanu, the prime minister, who headed the then minority liberal government. The main worry arising from the teachers’ pay increase, aside from the concerns over how it will be funded, centres on the impact it will have on the pay demands of other public-sector workers and, in turn, of private-sector workers. If such wage pressures are not resisted, then they will obviously only weaken further an already weakened Romanian competitiveness and in all probability would drive inflation back above the 10% mark in 2009. This would be the result in normal circumstances, but the Romanian economy is not in normal circumstances right now, and it is highly unlikely that the present credit crunch and the pressure from the international financial markets will leave time for this inflation spiral to run its course. Much more urgent matters are likely to make their presence felt first.<br /><br />Varujan Vosganian seems to be tirelessly explaining in the face of deaf ears that the proposed increase could push the budget deficit up in the direction of 7% of GDP in 2009, as no provision had been made to raise taxation, and the outgoing government issued an emergency ordinance on October 28th postponing the increase, following a warning from the IMF about the likely fiscal consequences.<br /><br />Defenders of the recent decisions, however, are quick to point out that Romania's accumulated public debt, at around 12% of GDP, is still extremely low. But this is to miss the force of the macroeconomic argument against running such annual deficits at time of high GDP growth. Basically, at this point, the Romanian economy has been overheating (and has not been stuck deep in recession), so the principal macro argument would be in favour of fiscal surpluses (and substantial ones, say 3% or 4% of GDP) to try and drain excess demand from the system. This is doubly the case when you look at the underlying difficulties of applying standard monetary policy (the central bank has been raising interest rates since to try and keep inflation better under control) in a context where foreign exchange denominated loans have been freely available at what effectively amount to negative interest rates. </p><br /><p>Although the government has made an effort to promote a more prudent fiscal policy, the temptation to win more voters has proved to be stronger. Consequently, the government decided to increase the benchmark index for calculating individual pensions by 20 % to RON 697.5 as of November earlier than originally planned. The benchmark index was already increased in November 2007 by 35 % and by another 7.5 % in January 2008. It will be further raised next January to complete the promised reform of the pension system aimed at bringing the average pension to 45 % of the average gross wage from the level of 35.5 % in November 2007. Doubtless we will soon here complaints about how "internation financial speculators" have brought the Romanian economy to its knees, but such voices would do a lot better looking at the degree of responsibility exercised by Romanian politicians in the face of the world's worst financial crisis in over 75 years, in a climate were concerns about procyclical fiscal deficits are known to be widespread.<br /><br /><strong>Substantial Inflation Pressures Remain</strong><br /><br />Inflation lies at the heart of the mechanism which has been steadily - via the expansionary fiscal posture - undoing the Romanian economy, and, right on cue, Romanian inflation increased again in October, hitting 7.4 percent, after dropping back to 7.3 percent in September. Consumer prices were up 1.1 percent month on month. </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisn2Sfr9C9r2irz50982La6yTV5bgBYlMoOwNtbNkX9voPqHBwfce45hKOnkavOnVxxrWRgvzBQXnRU-X70TYWntkdzHzd68TiVkT6ID0VYySauhi7OFfY4Db5KrXvpaY75XUKm5AQ-h_n/s1600-h/romania+inflation.png"><img id="BLOGGER_PHOTO_ID_5276273653611329330" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 184px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisn2Sfr9C9r2irz50982La6yTV5bgBYlMoOwNtbNkX9voPqHBwfce45hKOnkavOnVxxrWRgvzBQXnRU-X70TYWntkdzHzd68TiVkT6ID0VYySauhi7OFfY4Db5KrXvpaY75XUKm5AQ-h_n/s320/romania+inflation.png" border="0" /></a><br /><br />In the Romanian context it is impossible to relate this inflationary pressure exclusively to rising energy and food costs, doubly so since these latter have now been falling steadily since July. The Romanian economy has been running at a much faster pace than it can comfortably sustain, and nowhere has this been clearer than in the strong upward pressure on wages, with net wages growing at an annual 24.6 percent in September while unemployment continued to hover near a 16-year low. In fact annual net wages increases have averaged around 24% over the last 6 months (see chart below), while real wage increases (allowing for inflation) have averaged around 15% throughout 2008.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZ4y85nDuJWc6op2prt1jc5jUP9P7mLwbE6fdYnNEKx1Fh2YVV0EvdTtjZGtNkQ5A_k7vuajT0HCQni93D6iwh6QOJgX3XfvfsCX5c41FviCF1XKC7dUbCLsE7Aby-SZM_w5c6nvwroacX/s1600-h/romania+wages.png"><img id="BLOGGER_PHOTO_ID_5276292259516612706" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 190px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZ4y85nDuJWc6op2prt1jc5jUP9P7mLwbE6fdYnNEKx1Fh2YVV0EvdTtjZGtNkQ5A_k7vuajT0HCQni93D6iwh6QOJgX3XfvfsCX5c41FviCF1XKC7dUbCLsE7Aby-SZM_w5c6nvwroacX/s320/romania+wages.png" border="0" /></a><br /><br /><br />Monthly unemployment has been running at around 3.9% of the labour force (or 350,000 people) according to data from the Romanian Labour Ministry, or at around 5.9% according to the EU harmonised rate published by Eurostat (the difference between these two numbers is due to the different methodologies and criteria used). In either case these are historically quite low rates for the Romanian economy, and it needs to be borne in mind that there are at least a million Romanians (or another 10% of the labour force) working abroad (largely in Spain and Italy) most of them sending monthly remittances home to their families and relatives, remittances which in their turn fuel domestic demand, demand which the economy lacks sufficient capacity to meet without putting pressure on inflation.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihZfgD7122pydltUgqJcWlqyl-DmCE4UeJI5I-Cuk_9Kh9rY1hiNOh15DQw_Rv2dZIdFNm7P5Fj8tSBwg5HrxCrmLux3INQGwBMUr6r1693iEedILvq8soZlSDKGKTNnnGnf4-c6XUE0NS/s1600-h/romania+unemployment.png"><img id="BLOGGER_PHOTO_ID_5276309430442151906" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 185px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihZfgD7122pydltUgqJcWlqyl-DmCE4UeJI5I-Cuk_9Kh9rY1hiNOh15DQw_Rv2dZIdFNm7P5Fj8tSBwg5HrxCrmLux3INQGwBMUr6r1693iEedILvq8soZlSDKGKTNnnGnf4-c6XUE0NS/s320/romania+unemployment.png" border="0" /></a> Of course, having made the point so forcefully about how much of a problem inflation has been in the Romanian economy, I think I should point out that this problem may well be set to disappear, or at least become somewhat less important in the general picture, should the Romanian slowdown prove to be as dramtic as I fear it might. We could move very rapidly from a situation of undercapacity and overheating to one of excess capacity, and sharp cooling as domestic demand folds and exports stagnate. Naturally everything depends on what happens to the Leu, since if we see a further substantial weakening in the currency this in itself will tend to add to inflation pressures, depending on how large a fall in the currency we are talking about.<br /><br /><br /><strong>Monetary Policy and the Leu<br /></strong><br />The Romania central bank which has been using monetary policy as best as it is able to try and fight the inflation threat, kept its key policy rate - which is the second highest in the EU after the 11% rate in Hungary - unchanged at 10.25% in October, although they did lowered reserve requirement on leu deposits (to 18% from 20%, as of November 24) in an attempt to ease the growing pressure on domestic liquidity which has been so evident since the mini financial crisis of mid October.<br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqvkNlMC2Gc3wncEBsNZpI_btXnbvI26xI1UpcxXdYpq1F1Kfr4JBvAYKZPWqalQCwwu7OpWHv9xL0LVt7tB2deWzvpsJ6O_nqrCRrLg9Qjq7Z-CGpSG3Xbk2K_G8gq6u22IFHxW2GIphh/s1600-h/romania+cb+rate.png"><img id="BLOGGER_PHOTO_ID_5274886077434015058" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 197px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqvkNlMC2Gc3wncEBsNZpI_btXnbvI26xI1UpcxXdYpq1F1Kfr4JBvAYKZPWqalQCwwu7OpWHv9xL0LVt7tB2deWzvpsJ6O_nqrCRrLg9Qjq7Z-CGpSG3Xbk2K_G8gq6u22IFHxW2GIphh/s320/romania+cb+rate.png" border="0" /></a><br /><br />Further monetary tightening (following the Hungarian example) might have seemed a more prudent strategy, particularly given the current comparatively low level of the real policy rate (only 2.75% above inflation), the continuing inflation pressures, the continuing loose fiscal stance and the recent credit rating downgrade from S&P. There is also the credibility issue to take into account, since Romanian inflation is still running well above the central bank year end target of 3.8%. On the other hand, if we take account of the rapid deterioration in the internal economic climate since October, then exercising caution may have been more sensible than it seems at first sight. The problem is that the Romanian central bank - like its Hungarian counterpart - is now caught between the need to protect the value of the Leu (given the prior level of forex borrowing) and the need to try to offset the rapid and dramatic decline in internal demand.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcLuJIR8_91Us4GJkD8hmlf0XyK_Aes1MtzcWVxi2UO4PEarY8Ytzw5jz0PIbEdfGwRnfD6zWOr4EsMCYwGc7YKCSdHgbd9B_R9_e8VFrculaZzp58EBgGAwOIO0YqhStcln5qMOB9Gqf4/s1600-h/euro+leu+cross.png"><img id="BLOGGER_PHOTO_ID_5274926159654888994" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 184px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcLuJIR8_91Us4GJkD8hmlf0XyK_Aes1MtzcWVxi2UO4PEarY8Ytzw5jz0PIbEdfGwRnfD6zWOr4EsMCYwGc7YKCSdHgbd9B_R9_e8VFrculaZzp58EBgGAwOIO0YqhStcln5qMOB9Gqf4/s320/euro+leu+cross.png" border="0" /></a><br />Just what kind of pressure we could see on the Leu in the coming weeks was illustrated during the days between 10 and 20 October, when the tremendous pressure on the currency (see spike in chart above) forced the Romanian cenbank to intervene directly in the foreign exchange market to defend the currency. Questions remain about the extent to which any local tightening policy can work while private indebtedness continues to be fueled by forex denominated (largely euro) loans and the NBR is sure to face increasingly difficult decisions as growth slows in the coming months<br /><br />In fact central bank Governor Mugur Isarescu argued that the bank responded to an "attack on the leu'' which had drained lei from the market and driven overnight interbank market rates sharply higher. The Banca Nationala a Romaniei sold 40 million euros on October 10 for lei on the interbank market and the Finance Ministry sold 291 million lei of three-year bonds on October 16. Overnight Interbank Bid Rates (ROBID) soared to 19 percent on October 17 (up from 16.53 percent on October 16) as banks frantically tried to get their hands on lei. Rates have subsequently come back down again, but at the start of December they were still hovering in the 12% to 13% range, well above the 7% to 8% range of January 2008, and also well above the 10.25% targeted central bank policy rate. Basically these rates seem to have gotten completely out of alignment with central bank policy towards the end of August, and there seems to be little evidence (or likelihood) that they will be coming back into line anytime in the near future (see <a href="http://www.bnro.ro/en/Info/Istoric/BB_istoric.asp">the time series for yourself here</a> - also anyone looking for a quick and handy list of banks with exposure to the Romanian market, <a href="http://www.ebrd.com/new/pressrel/2008/080307a.htm">the quoting banks for ROBOR</a> are ABN Amro, Bancpost, Banca Transilvania, BRD Groupe Société Générale, BCR, CEC, EximBank, ING, Raiffeisen Bank and UniCredit Tiriac Bank).</p><p>Some analysts question whether Romania can fin­ance its 59 billion euros in external debt without International Monetary Fund support of the kind secured by neighbours Hungary and Ukraine if such "attacks" continue to occur. The leu has now slipped 7 per cent against the euro since August, while the Romanian stockmarket is down 71% in the year to date and the leu has weakened by 21% against the US dollar over the same period.<br /><br /><strong>Romania's GDP Continues To Grow Strongly</strong><br /><br /><br />Romania's economy continues to put in a very strong performance and grew by an annual 9.1 percent in the third quarter, driven forward by the continuing consumption and lending boom, although most observers - including the the government - are agreed that all of this is now about to slow, and sharply. Indeed the government itself has forecast that growth will slow to about 4.5 percent next year, although others consider this to be rather overoptimistic under the circumstances and the big question is, just how "sharply" is sharply? Are we about to see one of those famous "hard landings"? There are reasons for believing that we may well be. </p><p>At this point it is very hard to see just how far the economy actually slowed in the third quarter (at an annual rate it fell back from 9.3% to 9.1%, which really doesn't seem like very big beer), in the first place since we still lack detailed data, and in the second because don't publish or supply to Eurostat seasonally adjusted quarter on quarter data, which is really the most informative number we could get are hands on at this point, if it existed. So we are really stuck with "proxies" like short term retail sales data, and confidence indicators (unfortunately Romania doesn't seem to have much in the way of PMI surveys).</p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipJ28HK0QKZFTvoVbN9la78u2Q78rwh_mkUwnrq1PAvVEyYMipoKRSNiOwcbP8Cj4rQOSMG0JYKkHk6iAda-iy2O3NCCpSiSkneZQQaSmgwXufp0oxivoGKZcMd3VI8gyh6Bk-xX_ElBoX/s1600-h/romania+GDP.png"><img id="BLOGGER_PHOTO_ID_5276208632133960706" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 190px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipJ28HK0QKZFTvoVbN9la78u2Q78rwh_mkUwnrq1PAvVEyYMipoKRSNiOwcbP8Cj4rQOSMG0JYKkHk6iAda-iy2O3NCCpSiSkneZQQaSmgwXufp0oxivoGKZcMd3VI8gyh6Bk-xX_ElBoX/s320/romania+GDP.png" border="0" /></a><br />Despite all this, you could say, couldn't you, that Romanian GDP growth still does look pretty robust. You could say this, that is, until you look at what actually happened to Latvian GDP growth following the onset of a credit crunch in that country. As we can see in the chart below, the Latvian economy was cruising along at a nifty 11% annual growth rate until the third quarter of 2007, at which point things started to go nastily wrong, and headline GDP growth fell off a cliff, reaching the dizzy low of around minus 5% a mere four quarters later. And of course Latvia is now stuck in a very, very deep slump.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLtqp_-7RCRw9xZCErHkg-896UNEcfPhK_fJ4OwRAPNkj9JlJ1Ico8xN_Eg7nx-9JtjMO96v6J_6GO14Um2WCctJW-HZWTr0xfueNbBrB5crgsi7LZiW0TPw5A_MSCTuqgl83a5yUz4R_p/s1600-h/latvia+GDP.png"><img id="BLOGGER_PHOTO_ID_5265902015511139170" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 200px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLtqp_-7RCRw9xZCErHkg-896UNEcfPhK_fJ4OwRAPNkj9JlJ1Ico8xN_Eg7nx-9JtjMO96v6J_6GO14Um2WCctJW-HZWTr0xfueNbBrB5crgsi7LZiW0TPw5A_MSCTuqgl83a5yUz4R_p/s320/latvia+GDP.png" border="0" /></a><br />So just what happened? Well basically, the Latvian economy was being driven to grow way too fast by a rapid increase in foreign exchange credit. And Latvia, like Romania, had large numbers of workers outside the country, busily sending home remittances, while wage inflation at home went up and up. As we can see in the chart below, this credit was effectively cut back sharply in the spring of 2007, and down came the Latvian economy on the back of the cut. As we can see in the earlier chart I presented, year on year increases in Romanian forex lending have now been slowing since the mid summer, and I think it is not unreasonable to suggest that there is a strong danger of following the Latvian path, especially after the "short sharp shock" of mid-October.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6QgnKyW0P0zT_H27o9oMog4CeCvBRBbvpTj7-Ud54pCyBKbuv5ztjohcRcRVAaDpeqCKziHG1ykJyNRxFKtEyPAkwGE-s-iOB_dvWQgKi5eap6ao48OhC2KQDQR01pIo0xUGp909VHnDG/s1600-h/latvia+household+debt.jpg"><img id="BLOGGER_PHOTO_ID_5248428609342048786" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6QgnKyW0P0zT_H27o9oMog4CeCvBRBbvpTj7-Ud54pCyBKbuv5ztjohcRcRVAaDpeqCKziHG1ykJyNRxFKtEyPAkwGE-s-iOB_dvWQgKi5eap6ao48OhC2KQDQR01pIo0xUGp909VHnDG/s320/latvia+household+debt.jpg" border="0" /></a> So just when will Romania enter recession? At this point it is hard to say, but if the Latvian pattern is anything to go by, negative year on year growth could arrive as early as Q3/Q4 2009, and we might even see quarter on quarter contractions starting with Q1 2009 (although we won't necessarily know this, since, as I say, the data we need simply isn't published).<br /><br /><strong>Government Aid Package<br /></strong><br />In response to this deteriorating outlook the outgoing government did announce a stimulus package, which is scheduled to take effect in January, and involves items like exempting reinvested dividends from a 16 percent tax, giving companies a bonus of 1,000 euros for every person they hire who has been unemployed for more than three months and faciliating 500 million euros worth of investments and other aid for farmers. There is also an allocatation of 3 billion euros for job-creating investments, lower social insurance payments and a 250 million-euro credit line for medium and small businesses via a cash injection into state-owned bank CEC.<br /><br />The government will grant aid of as much as 50 million euros to companies planning to invest more than 100 million euros and create at least 500 jobs, according to the plan. Investments of less than 100 million euros that generate at least 300 jobs stand to receive aid which could total up to 28 million euros. It will also give companies a 5 percent reduction in their tax bill in exchange for paying taxes on time and exempt new car sales for a year from a "pollution tax'' that ranges from 150 euros to 700 euros per car.<br /><br /><strong>Credit Downgrades</strong><br /><br /><br />But all of this is likely to be of little avail, since it is mainly small scale counter cyclical stimulus if the international financial standing of Romania continues to deteriorate. In late October the international ratings agency Standard & Poor’s (S&P) cut Romania’s long- and short-term foreign-currency sovereign credit ratings from BBB-/A-3 to BB+/B, and its local-currency long-term rating from BBB to BBB-. S&P pointing out the growing risks posed by high and rising private-sector leverage and dependency on an increasingly uncertain external financing channel. Given the size of Romania’s macroeconomic imbalances, they argued, the economy is highly vulnerable to any sudden tightening in external financial conditions which could cause a sharp downturn in economic growth. </p><p>On November 10 Fitch followed suit, and downgraded Romanian debt - together with that of Bulgaria, Hungary and Kazakhstan - two notches to what is effectively 'junk' status (specifically BB+) as a result of their "concerns about the macroeconomic policy framework in Romania" and the country's ability to avoid a severe economic and financial crisis. Noting the widening current account deficit - which is expected to exceed 14% of GDP this year - a deficit which Fitch believes has been fuelled by excessive credit growth, the agency argued that a much stronger policy adjustment, especially in the fiscal policy area, would have been needed to avoid a currency crisis. Fitch specifically drew attention to the private sector foreign currency balance sheet mismatches, and argued that any imminent currency crisis would "require substantial external financial support from the international community to prevent a sovereign credit crisis."<br /></p><p>Fitch specifically singled out Emerging Europe as the most vulnerable Emerging Market region to the deterioration in the global financial and economic environment owing to the fact that so many countries have large current account deficits and relatively high levels of short-term external debt, and that these render them particularly susceptible to reduced capital and financial market flows (including from foreign parent banks). </p><br /><p>Since the onset of the credit crunch in August 2007, Fitch has now downgraded the foreign currency ratings of nine countries in emerging Europe (by a total of 11 notches), and this contrasts with just three upgrades that have been made over the same period. Eight countries are now on Negative Outlooks - which a record level for the region - while no countries are on Positive Outlooks, signalling that ratings remain under downward pressure. </p><p><strong>IMF Aid In The Pipeline?</strong></p><br /><p>Obviously with the EU institutionally bogged down in its own issues of core and systemic bank bailouts, it is clear that the community's ability to offer meaningful assistance to Romania is going to be limited. Thus all eyes in Eastern Europe have been looking hopefully over in the direction of Washington, and the International Monetary Fund. The IMF has already offered aid to Hungary, Iceland, Serbia and Ukraine to help them cope with the difficult coktail of a credit drought, falling investment and shrinking government revenue. Romania, has so far not openly sought IMF help, although this does not mean that channels of communication and "dialogue" have not been opened. The sheer size of the current account deficit and the short term increase in the very sensitive area of government spending may make it increasingly difficult to fund the country’s $75 billion in external debt without IMF aid. In a statement to the local media, Juan Jose Fernandez-Ansola, the International Monetary Fund's (IMF) senior representative for Romania and Bulgaria recently observed that "The initiative to increase teachers' wages by 50% may need to be reconsidered. We estimate the impact on the budget would be modest in 2008, but would reach over 0.75% of GDP in 2009. In addition, if the increase were extended to other public sector employees, the impact could reach over 4% of GDP in 2009. This would send a wrong signal to financial markets." So it is not hard to see the kind of tack the IMF will be taking in any negotiations.<br /><br />However, there are important differences in the monetary systems of Romania on the one hand and the Baltic states and Bulgaria on the other, and these differences may facilitate rather than complicate the issue of IMF aid. The Baltics and Bulgaria all operate some variant of the currency board system, whereby the currencies are pegged to the euro at a fixed exchange rate (or within a narrow band), a feature which effectively prevents these economies from conducting their own independent monetary policy, thus placing the entire burden of macroeconomic adjustment on fiscal policy. The appreciation of the euro against the US dollar damaged the competitiveness of those economies vis-à-vis those economies whose currencies are linked to the dollar. Romania's managed-float on the exchange rate side has, in contrast, provided it with greater flexibility and some ability to utilise monetary policy as part of its macroeconomic stabilisation programme. </p><p>Thus Romania has been able to resort to some degree of exchange rate depreciation to preserve external competitiveness over the past 12 months, while the central bank pushed up interest rates to keep real rates at positive levels and contain inflationary pressures. The complicating factor here has been the availability of substantial foreign exchange credit, at rates well below those imposed by the NBR. This has undoubtedly taken much of the cutting edge off central bank monetary policy in the short term, although as we are seeing, this supply of cheap credit has now, suddenly, "run dry".<br /><br />At the end of the day there is substantial agreement between all the main institutional actors (leaving aside Romania's own political class) - the NBR, the IMF, the EU Commission and the ECB - that Romania's external deficits are unsustainable in the long run; that fiscal policy has been ill-advisedly pro-cyclical; that wage growth has been excessive; that rapid credit-growth has been fuelling an unsustainable growth in consumption; and that a sharp and significant correction is now about to take place.<br /></p><p></p><p><strong>The Immediate Outlook<br /></strong><br /><br />This year's extremely good agricultural harvest has undoubtedly offered strong support to headline GDP growth in recent quarters, but this fortuitous virtuous circle may well repeat itself in 2009. On the other hand, the financial position of private households, after becoming ever more strained as domestic interest rates have steadily risen, together with the costs of servicing a growing volume of private debt, may well now deteriorate substantially as the lack of available credit and the rising layoffs in manufacturing industry exert an ever-tighter grip. In general terms, private consumption was already slowing before the onset of the credit crunch in October, and increased by 12.2 % yoy in Q2, following the record high of 14.3 % yoy in Q1. </p><p>Investments also continued at a strong pace in Q2, driven mainly by new construction projects (up 34.8 % yoy), while investments in equipment was already slowing (down to 23.8 % yoy in Q2). In the first half of the year the construction sector absorbed 20 % of total investments in the economy, and it is this sector which will now be particularly hard hit.</p><br /><p>Slowing construction activity is now expected for the rest of the year, and should become more pronounced as we enter 2009 and new project steadily dry up. Prices of new housing and real estate transactions generally have been losing momentum in recent months, especially in the capital city Bucharest. This slowdown can also be observed in the national construction activity index, which has seen the value of construction works drop to an annual 19.1 percent rise in October (down from 28.3 percent in September, and down even further from the average 33 % yoy increase registered in the first half of 2008) . Month on month, construction growth slowed to 5 percent in October from 8.5 percent in September. More importantly, the number of new building permits issued has now been showing a steady monthly decline. Evidently the volume of construction activity continues to rise (even if at a slower pace) since existing projects need to be completed - credit crunch or no credit crunch, and regardless of whether there will actually be buyers for the completed properties. But at some stage activity may well grind to a near halt, as the appetite for new building projects suddenly evaporates. This is what we have seen in other similarly affected economies, and there is no good reason why Romania should be any different here.</p><p>This view is reflected in the recent press statements made by Gabor Futo, executive manager of real estate developer Futureal Group. Futo takes the view that no new real estate projects will be started in the next two years and that 90 percent of the forthcoming ones already announced will be called off for lack of financing. Futo testifies to the way in which banks are now much more cautious in making loans and how developers are experiencing increasing difficulties in obtaining financing. Futureal recently started work on the new commercial center "Gold Plaza" in the northern city of Baia Mare. The center will have 30,000 square meters - all of them available for rent. The project aims to be completed in the first quarter of 2009 and will cost about 97 million euros. The company is a leading developer in Central and Eastern Europe, with projects worth more than 1.6 billion euros, including more than 6,000 residential units and some 500,000 square meters of commercial area.</p><p></p><p>And, of course, it isn't only the construction sector which is getting hit. Since the problem is the availability of credit rather than interest rates per se, then anything which can't simply be bought on a credit card will be affected, and first in line here is the Romanian auto industry which could register its first bankruptcies towards the end of the first half of 2009 according to Alin Tapalaga, Manager of Porsche Inter Auto, the retail division of the Porsche Romania . Tapalaga feels the most affected companies will be those who have recently built showrooms, and especially in the past year using bank loans as finance,.</p><p>The Romanian banks themselves are expecting a massive drop in lending to individuals in the last quarter of the year, especially for mortgage loans, despite forecasts of cheaper land and properties, following a worsening in lending conditions, according to a recent survey carried out by the central bank. Not surprsiningly, credit cards are the only lending product for which banks expect to see a slight increase in use in the last quarter, but even here they expect a much smaller increase than the one registered between July and September 2008. </p><p><br />And all this reticence to spend comes despite (or perhaps because of) the fact that property prices are now falling. Three-room apartments in Bucharest have fallen by around 15 percent since the beginning of the year according to the the ZF real estate index. ZF suggest that prices nationally have dropped by 2 percent to 3 percent over the last six months, following stagnation or even slight increases earlier in the year. ZF compile their index by analysing prices asked by sellers on the anuntul.ro website. The value at which the deal is actually closed may be as much as 20 percent below the asking price they say. Whereas a typical seller was asking an average of 140,000 euros for a 70-square metre three-room apartment in January, the price reached 118,000 euros in November, or over 20,000 euros less. The sharpest monthly decline was registered in November, when the average price per square metre reached 1,686 euros, 5 percent lower than in October, according to the ZF analysis.</p><p><strong>Exporting Your Way Out Of Trouble?</strong></p><p>With domestic demand now set to fall sharply, as people buy less property and large ticket items, while companies prune back investment in response, the only way forward for Romania to achieve economic growth - and pay off its debts - would appear to be through exports, since the fiscal policy arm has, as we have seen, been basically frittered away during the good times. But here we hit a big snag, since Romania runs a large goods and services trade <strong>deficit</strong>. In fact, between January and September 2008, Romania's balance-of-payments current account posted a deficit of 12.7 billion euros, up 14.8 percent over January-September 2007. The deterioration was largely a result of the wider trade deficit (13.7 billion euros), which was up 11.7 percent over the same period of last year. On the positive side exports did grow (19.4%) more rapidly than imports, but that will be of little consolation if exports need to drive an economy where domestic demand is either flat (best case) or declining. </p><p>And funding this deficit could become increasingly problematic, since foreign direct investment now covers only around one third of the gap in the current account, which means that foreign debt is on a strong upward spiral. Effectively this situation makes Romania susceptible to capital outflows in the medium term, and, were this to happen it would trigger a harsh real adjustment for Romania's economy and its citizens. </p><p>Romania needs to attract capital inflows (including FDI) in the region of 15 billion euros per year to cover a current-account deficit which is expected to exceed 13% of GDP. In 2008 alone it is estimated that the net external indebtedness of Romania will rise by some 6 billion euros. Non-publicly guaranteed external debt came in at 31.501 billion euros at the end of September, up 25.9 percent from year-end 2007. The NBR has, of course, built up a strong foreign exchange reserves (27 billion euros at the end of November, or around 8 months imports) and can more than likely ride out the change in market sentiment in the short run. Also foreign direct investment of 7.2 billion euros covered 56.6 percent of the current account deficit over the January-September period, with equity stakes and reinvested earnings making up 52.7 percent of the total, while intra group loans accounted for the other 47.3 percent. </p><p>But at the end of the day, having the reserves to ride out the crisis (with or without the aid of the EU and the IMF) isn't really the problem. The problem is how you turn a credit-driven internal-demand-boom economy into one where new-found export competitiveness means external demand drives growth. And how you do this, while protecting all those heavily-forex-leveraged households form the more or less inevitable downward correction in the value of the leu. Obviously the path from one point to the other passes through a hell of a lot of what we economists call "creative destruction", but lets just hope for the sake of all those who have to live through this "correction" inside Romania don't find the whole process a far too painful one. </p>Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-918478938386753900.post-3833223111502575512008-09-03T12:39:00.000-07:002008-09-04T09:44:19.142-07:00Romania Producer Prices Accelerate Again In July, Wages Continue To RiseRomanian producer price inflation accelerated to the fastest pace in four years in July as energy and labor costs soared and a weaker leu nudged up import prices. The cost of goods produced in factories and mines rose an annual 20.3 percent the fastest rate since August 2005, compared with 19.4 percent in June, according to data from the Bucharest-based National Statistics Institute. Prices grew 1 percent on the month, following a 2.1 percent rise in June.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3-2yDhrj4T0BkundqY_S-GsscZxK08QhaczlE7I_OX_saxCDHbgfA9KQjyRqxCbW17b26XXJGUcG7ttbslppGI9vlrmxTAfh_0FIQSV6oujM5U0O_oyReEns5DRxTGOogY6O0VlyxLE89/s1600-h/romania+PPs.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3-2yDhrj4T0BkundqY_S-GsscZxK08QhaczlE7I_OX_saxCDHbgfA9KQjyRqxCbW17b26XXJGUcG7ttbslppGI9vlrmxTAfh_0FIQSV6oujM5U0O_oyReEns5DRxTGOogY6O0VlyxLE89/s320/romania+PPs.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5241882241406099106" /></a><br /><br />Prices of manufactured goods rose an annual 23.2 percent in July, compared with an increase of 22.1 percent in June. Price growth in the mining and drilling industries slowed to 16 percent from 17.8 percent and costs of electricity, natural gas and water rose an annual 5.5 percent after a 0.1 percent increase in June.<br /><br /><span style="font-weight:bold;">Wages Up An Annual 25.8%</span> <br /><br />Romanian annual wage growth, a key factor behind the central bank's recent interest rate increase drive, accelerated further in July as rising investment continued to boost demand for workers.<br /><br />Net monthly wages rose an annual 25.8 percent to 1,273 lei ($564), compared with a 24.4 percent increase in June, according to the latest data from the Bucharest-based National Statistics Institute. Wages rose 2.7 percent on the month.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY7hH2_PVEvClY8pj1az_tRsTzyKy4ca7zgnieASWLdpP6guhSCR83Nr9TOprc2hX2ZVqWutkkZQTtAh_R8n_bGt3BVTKyc4h8VK9ClH7zbZD_A6V_p8jbydfQBwIE2DsDVio3JvD5YBIm/s1600-h/romania+wages.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY7hH2_PVEvClY8pj1az_tRsTzyKy4ca7zgnieASWLdpP6guhSCR83Nr9TOprc2hX2ZVqWutkkZQTtAh_R8n_bGt3BVTKyc4h8VK9ClH7zbZD_A6V_p8jbydfQBwIE2DsDVio3JvD5YBIm/s320/romania+wages.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5242198879882692258" /></a><br /><br /><br />Wage increases have helped boost retail sales and imports, and propelled economic growth up to 9.3 percent in the second quarter. The central bank has also said higher wages drove annual inflation to a three-year high of 9 percent in July and forced it to raise its key interest rate to 10.25 percent, currently the highest in the EU.<br /><br />Domestic demand has also been fuelled by strong inflows of worker remittances and a lending boom. Total private sector debt (households and companies) was up by an annual 55.8 percent in July. Now the interesting thing is that this rate of increase is now slowing, and if the slowdown in the rate of increase continues then construction will gradually grind to a halt as we have seen in other credit and construction boom driven economies.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUI8ZlWzwp9WmvUrS0s7gWX7LpKaTSdPIhnkmwt069uHjUrFAHeTUcD1yECkCjQubv2rdL4lTzc-JlgX05FgSPmytUzDx1AtvuRwHVnV_h7z8rUvs34GShbWPhunhN4uSXXoslfb6XwjE5/s1600-h/romania+household+credit.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUI8ZlWzwp9WmvUrS0s7gWX7LpKaTSdPIhnkmwt069uHjUrFAHeTUcD1yECkCjQubv2rdL4lTzc-JlgX05FgSPmytUzDx1AtvuRwHVnV_h7z8rUvs34GShbWPhunhN4uSXXoslfb6XwjE5/s320/romania+household+credit.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5242203692892252706" /></a><br /><br />The rate of increase has been slowing since it hit a peak in January at 66.8%. But a word of warning needs to be added here, since the stock of loans includes a very large proportion - 54% in July - which are forex denominated (mainly euros), and the leu has been rising against the euro until very recently (driven by the high yields on offer following the interest rate rises at the central bank), which means that the leu value of the stock would decline, so there is a valuation component here. Nonetheless I think it is a pretty safe call to say that the credit boom in Romania is now past its peak, and what awaits us is the inevitable slowdown.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbhJuY_e70XPNMJ_r7edC2JZP7xZgKcO_BvO-DyJ0B3Vkv5N_ftPtvuTfoStY-H77m6v5PSmkNjqDLah_UaM7ap2iB97Nbi13AHOsUHUG_WsAPwwj4QWFjCkuYFw7Hf8aT-ntnAFXQsbz0/s1600-h/euro+leu.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbhJuY_e70XPNMJ_r7edC2JZP7xZgKcO_BvO-DyJ0B3Vkv5N_ftPtvuTfoStY-H77m6v5PSmkNjqDLah_UaM7ap2iB97Nbi13AHOsUHUG_WsAPwwj4QWFjCkuYFw7Hf8aT-ntnAFXQsbz0/s320/euro+leu.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5242207701441906162" /></a>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-918478938386753900.post-65415015705570611802008-09-01T07:40:00.000-07:002008-09-01T07:52:43.884-07:00Romania's Economic Growth Accelerates In Q2 2008Romania's economy grew faster than generally expected in the second quarter, fuelled by a lending boom, increased investment and rising wages. The economic expansion accelerated to an annual 9.3 percent from 8.2 percent in the first quarter, according to preliminary data out today from the Bucharest-based National Statistics Institute.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjToDHVP8NBh5wDZ-bd06sPrBmZ5g3B2veuGkAfjpPwG0nSansiux8HQa24D3jdVwRWDjY52KJWMWFng4YmxiN0XwRaB1mO9weApjWMyJx06MCrMIHSQN5EGDq9FWP9C4L0cCgoMODTWEiB/s1600-h/romania+GDP.jpg"><img id="BLOGGER_PHOTO_ID_5241064182903604834" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjToDHVP8NBh5wDZ-bd06sPrBmZ5g3B2veuGkAfjpPwG0nSansiux8HQa24D3jdVwRWDjY52KJWMWFng4YmxiN0XwRaB1mO9weApjWMyJx06MCrMIHSQN5EGDq9FWP9C4L0cCgoMODTWEiB/s320/romania+GDP.jpg" border="0" /></a><br /><br />Net wages were up 24.4 percent in June, while annual private debt was up 65%. As a result domestic investment grew in the second quarter by 30 percent from the same period last year - and reached 6.5 billion lei ($2.7 billion) - led by a 35 percent increase in construction. Central bank Governor Mugur Isarescu forecast 9 percent growth for 2008 last month, and warned the economy is "overheating" with upward pressure on inflation and a deteriorating current-account deficit.<br /><br />To try to restrain domestic deman the central bank raised its main interest rate to 10.25 percent in July, the highest in the EU, as the inflation rate rose to a three-year high of 9 percent.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-35108855744679550552008-08-12T07:41:00.000-07:002008-08-12T07:53:25.746-07:00Romania Inflation Accelerates Again in JulyRomania's inflation rate rose to a three-year high in July as increases in government-administered prices added to pressure from a consumption boom which is being fuelled by soaring lending, rapidly rising wages and a strong stream of remittances from Romanians working in Spain and Italy. Inflation accelerated to an annual 9 percent in July from 8.6 percent in June, according to the latest data from the National Statistics Institute earlier this morning. On the month, prices rose 0.7 percent, following 0.3 percent rise in June.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm7teMv3vSbDAqOCvrox6PiQDAQ5RK8yqaE__bMEQvVpAC-Rm5rtns9Uf-wYXSt-89eejbv9kJbFsMEb3ZfUmo88n2giTfkFIBz9w5GjE3772hrUwo7PwSAtFTODXnTNhKHLjeAsx0Qrf1/s1600-h/romania+CPI.jpg"><img id="BLOGGER_PHOTO_ID_5221872749548816466" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm7teMv3vSbDAqOCvrox6PiQDAQ5RK8yqaE__bMEQvVpAC-Rm5rtns9Uf-wYXSt-89eejbv9kJbFsMEb3ZfUmo88n2giTfkFIBz9w5GjE3772hrUwo7PwSAtFTODXnTNhKHLjeAsx0Qrf1/s320/romania+CPI.jpg" border="0" /></a><br /><br /><br />The government increased natural gas prices by 12.5 percent and electricity prices by 5.3 percent effective July 1. It also raised taxes on tobacco to 50 euros ($75) per 1,000 cigarettes from 41.5 euros.<br /><br /><br />Romania's economic expansion, fuelled by consumer spending, cheap loans and surging wages, was seen by many as a benign process which were simply bring western European living standards to the EUs poorest member state. Now, inflation is soaring, property prices have started falling and the current-account deficit is widening steadily. Romania's increasingly looking like a copy-cat version of what has already taken place in the Baltic nations of Estonia and Latvia.<br /><br /><br />State-administered price increases added to pressure from rising international food and fuel costs to boost inflation from a 17-year low of 3.7 percent in March 2007. The increase have prompted the central bank to raise its key interest rate seven times since last October to the current level of 10.25%, which is the highest rate in the European Union.<br /><br /><br />A weaker leu, which has lost more than 11 percent of its value against the euro in the past year, has also pushed up consumer prices. Rising wages and a lending boom are the main drivers behind price increases in recent months. Net paychecks were up an annual 24.4 percent in June as private debt expanded 63.4 percent on year.<br /><br />Central bank Governor Mugur Isarescu said on Aug. 4 inflation will start to slow this month as an expected bumper farm crop lowers food prices and the increase of state-administered prices slows. He added that the economy, which grew 8.2 percent in the first quarter, would expand as much as 9 percent this year.<br /><br /><br />Romanian annual wage growth, which prompted the central bank to raise the European Union's highest interest rates last week, accelerated to 24.4 percent in June as investment boosted demand for workers. Net monthly wages rose to 1,273 lei ($564) in June, the Bucharest-based National Statistics Institute said in an e-mail today. Growth accelerated from an annual 23.3 percent in May, while wages rose a monthly 2 percent.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijY6GGWvi4dHEvJYGTKKD3aZ_BCxs7A1D685pMLIAuavHx9ce_NhMdjEl2MrPZA0TVZtcvMVhL2dRK1gLAk2idxaTN9mJmLhPJ-GaXe4mUJ_G_Zn7GIYBkFwVin_jqDYDmK_0g3Jc4s41a/s1600-h/romania+wages.jpg"><img id="BLOGGER_PHOTO_ID_5231011808930986786" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijY6GGWvi4dHEvJYGTKKD3aZ_BCxs7A1D685pMLIAuavHx9ce_NhMdjEl2MrPZA0TVZtcvMVhL2dRK1gLAk2idxaTN9mJmLhPJ-GaXe4mUJ_G_Zn7GIYBkFwVin_jqDYDmK_0g3Jc4s41a/s320/romania+wages.jpg" border="0" /></a><br /><br />Central bank Governor Mugur Isarescu said last week that wages are rising too fast, helping boost the inflation rate above 9.1 percent in July and outstripping productivity gains, while the economy is ``obviously overheating.''<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s1600-h/romania+central+bank.jpg"><img id="BLOGGER_PHOTO_ID_5229154029652023058" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s320/romania+central+bank.jpg" border="0" /></a><br /><br />Romania's entry to the EU last year set off labor migration to Italy, Spain and other bloc members, aggravating a labor shortage and further increasing wages. The remittances they send home on a monthly basis has also boosted demand for workers inside Romania.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNagb4GPeMw27tf5VQXUlZU0bu19se6FIysX4WthCNfRj9iXyIA50x9CNnkuFI0VCCm7VUrCZhyphenhyphen2YmqZv2yqpJFdY-GDWWFF__QCCqW1wqm9Tv-c7Hikdz10ubVwbp9c321ud0nh7u6926/s1600-h/romanians+in+spain.jpg"><img id="BLOGGER_PHOTO_ID_5231015052121556706" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNagb4GPeMw27tf5VQXUlZU0bu19se6FIysX4WthCNfRj9iXyIA50x9CNnkuFI0VCCm7VUrCZhyphenhyphen2YmqZv2yqpJFdY-GDWWFF__QCCqW1wqm9Tv-c7Hikdz10ubVwbp9c321ud0nh7u6926/s320/romanians+in+spain.jpg" border="0" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7PL6vpJS3npwNgxdUNgnKZIUSnV701MoIWi1oUA53R_HE2UHOfnaCO0ucOh_iwoMS7xfypgwrsk6oXdzlVoLttEs9hyphenhyphenwbqLuX2pUV4S-oeZzy5fIt4MFF91-tpGSyVrTkf3kCDEbL_soM/s1600-h/romanians+in+italy.jpg"><img id="BLOGGER_PHOTO_ID_5231015774742596834" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7PL6vpJS3npwNgxdUNgnKZIUSnV701MoIWi1oUA53R_HE2UHOfnaCO0ucOh_iwoMS7xfypgwrsk6oXdzlVoLttEs9hyphenhyphenwbqLuX2pUV4S-oeZzy5fIt4MFF91-tpGSyVrTkf3kCDEbL_soM/s320/romanians+in+italy.jpg" border="0" /></a><br /><br />Unemployment in June was 3.8 percent, the lowest rate in 16 years, the National Labor Agency said on July 10.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjw0sqRRwrfItvXikijf-3arNvEtxI_mufvc7pRffIZFBNiUNvekjLC7agRaJdDz_2f4Gt_BqTE8sYXs0WgEOGhZlflPKSS0Va0ourpfnzXplkihwVCVzKXWemEKzhrxIthAikblWNPCeM-/s1600-h/romania+unemployment.jpg"><img id="BLOGGER_PHOTO_ID_5231013924882959778" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjw0sqRRwrfItvXikijf-3arNvEtxI_mufvc7pRffIZFBNiUNvekjLC7agRaJdDz_2f4Gt_BqTE8sYXs0WgEOGhZlflPKSS0Va0ourpfnzXplkihwVCVzKXWemEKzhrxIthAikblWNPCeM-/s320/romania+unemployment.jpg" border="0" /></a><br /><br /><br />Higher paychecks are also helping spark a lending boom as Romanians exercise their increased borrowing power. At end-June 2008, total non-government credit was up year on year by 63.4 percent, or 50.5 percent in real terms, on the back of the 40.0 percent increase in RON-denominated loans (28.9 percent in real terms) and the 89.3 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 62.7 percent).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh71nRTTPnrRzbErgFRQWK8Zb8NbQvKuNXIhsCH_jbCyZN2uts2aPFZAed5l7T6FiMJ4FwWCVHhlUpW3ob-CFUfSTeNO2SQsFrBnZn9An6vXWvM98jxno5zxZDWjECUZxwcdsP-S75tgkH/s1600-h/romania+creit+2.jpg"><img id="BLOGGER_PHOTO_ID_5228508311150950722" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh71nRTTPnrRzbErgFRQWK8Zb8NbQvKuNXIhsCH_jbCyZN2uts2aPFZAed5l7T6FiMJ4FwWCVHhlUpW3ob-CFUfSTeNO2SQsFrBnZn9An6vXWvM98jxno5zxZDWjECUZxwcdsP-S75tgkH/s320/romania+creit+2.jpg" border="0" /></a><br /><br />Romania's construction industry, including commercial and engineering works, expanded an annual 34 percent in May, the fastest pace in the EU, the institute said on July 4.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvCU9qBc0pE3hNBDc3SlhyJcAcB7XawX7IaLP7u5HFT93O7Tx0hds53ooUMyHdYZZdXUZP6LtouLdl43kxE3WdUILHw4y4SrIMK589KEmks0RL2WZ94v9k6pIc4WVKyh7vgWJC_gCLKBlg/s1600-h/romania+credit.jpg"><img id="BLOGGER_PHOTO_ID_5228505670092027154" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvCU9qBc0pE3hNBDc3SlhyJcAcB7XawX7IaLP7u5HFT93O7Tx0hds53ooUMyHdYZZdXUZP6LtouLdl43kxE3WdUILHw4y4SrIMK589KEmks0RL2WZ94v9k6pIc4WVKyh7vgWJC_gCLKBlg/s320/romania+credit.jpg" border="0" /></a><br /><br />The Romanian Association of Construction Companies has said builders, who employ 300,000 workers in the nation of 22 million, need another 300,000 workers just to stay on scheduled with current projects.Unknownnoreply@blogger.com13tag:blogger.com,1999:blog-918478938386753900.post-49371987490444277812008-08-07T06:50:00.001-07:002008-08-07T07:01:28.784-07:00Romania Industrial Output and Retail Sales June 2008Romania's industrial output increased year-on-year in June, according to the latest data from the National Institute of Statistics. However, on a monthly basis, output fell over May. Industrial output grew at a 4% year on year pace in June, helped by a 5.1% rise in production from the manufacturing sector. However, output of utilities fell 2.3%, and that of mining and quarrying declined by an annual 3.1%.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlv2OzUzZBtPkI73zqKkl6DNWwtBGbBGMuDcCT-VJqur46lyWDMyzs7OAjgMBh-DafBsD6QyYEVwKSCOKpSlXB-cboDrf0d8xOQbehbq_T-3KNWQ9VHtCA-__6SRTSUUPM2HTzYIEw4CV_/s1600-h/romania+industrial+output.jpg"><img id="BLOGGER_PHOTO_ID_5231772944857790962" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlv2OzUzZBtPkI73zqKkl6DNWwtBGbBGMuDcCT-VJqur46lyWDMyzs7OAjgMBh-DafBsD6QyYEVwKSCOKpSlXB-cboDrf0d8xOQbehbq_T-3KNWQ9VHtCA-__6SRTSUUPM2HTzYIEw4CV_/s320/romania+industrial+output.jpg" border="0" /></a><br /><br />Month-on-month, industrial output fell 1.5% mainly because of a fall in production from the manufacturing and utilities sectors. However, output from mining increased. Most industries showed evidence of a decline in output. The steepest fall in output of 2.8% was for intermediate goods, followed by a 2.4% fall in the production of capital goods. Production of energy fell 0.7%, while consumer goods output fell 0.5%.<br /><br /><br /><br />Meanwhile, in another report published this morning, the statistical agency said that the volume of retail sales excluding motor vehicles expanded 19.3% in June. This was helped by double digit growth from both the food and non-food sector. Retail sales of non-food items grew 27.1%, while that food, beverages and tobacco was up 10.9%.<br /><br />Sales volume for the maintenance and repair of motor vehicles, motorcycles, which includes also retail sales volume of motor fuel, increased 23.5% in the month. The rise was mainly due to a 24.3% increase in the sale of motor fuels. Turnover in business services were up 7.3% in the month. Retail sales, excluding motor vehicle sale, increased 9.7%. Sales volume of motor vehicles and cycles, including repair and maintenance fell 13.7%. On the other hand, retail sales of services grew 23.6%.<br /><br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW7lyP8HobPbak8q1Ygs7e7i9EWFwOMSIbMR_Y_U78WKFwAsVXBvhwxOIMEig4r_xVN6qIt1pGRAjlbnwgp1QEFL3O6-gyKsHOlxadWaVWJIsYtSiY_jgo_4Ip57DeWcFTxWOqfNVTjBpV/s1600-h/romania+retail+trade.jpg"><img id="BLOGGER_PHOTO_ID_5231772870812835666" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW7lyP8HobPbak8q1Ygs7e7i9EWFwOMSIbMR_Y_U78WKFwAsVXBvhwxOIMEig4r_xVN6qIt1pGRAjlbnwgp1QEFL3O6-gyKsHOlxadWaVWJIsYtSiY_jgo_4Ip57DeWcFTxWOqfNVTjBpV/s320/romania+retail+trade.jpg" border="0" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-6625507782363178922008-08-06T06:12:00.000-07:002008-08-06T06:13:13.558-07:00Where Now for CEE and Baltic Currencies?<p>By Claus Vistesen: Copenhagen</p><p><br />Ever since the illusive credit turmoil began sentiment in the market place has been fickle and essentially, like the assets of which it consists, volatile. We started off with an adamant focus on downside risks to growth which then turned into a focus and fear of inflation. Now, as the cyclical data has turned for the worse <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/7/25/the-eurozone-that-sinking-feeling.html">in Europe</a> and many places <a href="http://chinaeconomywatch.blogspot.com/2008/08/china-manufacturing-contracts-in-june.html">in Asia</a> the focus seems to be reverting to growth. Now, I won't go into the whole decoupling v recoupling discussion at this point since I think that this dichotomy is a false one. It never was about de-coupling <em>à la traditionelle</em> but moreso about two interrelated points. The first would be the extent to which the world already has decoupled from the US in the sense that a key group of emerging economies are now set to ascend in economic prowess. The second would be the extent to which the de-coupling thesis always built on a fallacy. The main point would be that the main fault line of slowdown was observed across economies with external deficits; something which, I am sure most will agree, is sure to impact surplus economies too. </p><p>Now, that does not completely let the ECB off the hook since by maintaining a focus on inflation it also assumed the role, if only temporary, of the new anchor in a re-wamped version of Bretton Woods II as the Euro ascended to new highs. This bet on global re-balancing was always going to end in tears and <em>in this light</em> the Eurozone could not decouple from the US; that much, I think, is true.<br /></p><p>The key issue here however, as I have argued time and time again is represented in two crucial interlocked questions which together form a key structural trend in the global economy. One is what happens when the surplus economies slow down and there is not sufficient demand to pull the economy back up? Demographics and a high median age are key variables to watch in this regard. The second question is the extent to which hitherto deficit nations can turn the boat around and increase savings (i.e. rely more on exports) and what it will mean for global capital flows when they begin this process?<br /></p><p>In the context of the CEE economies the themes above are also present. <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/5/26/currency-dilemmas-in-eastern-europe.html">In a recent note</a> I detailed the change in sentiment from growth to inflation and what it might mean for Eastern Europe's economies and their respective currencies. The key situation as I sketched it was one of a dilemma.<br /></p><br /><blockquote>On the one hand, the rampant inflation levels suggest that the exchange rate be loosened to allow appreciation and thus pour water on the roaring inflation bonfire. On the other hand however the Baltics, as well as many other CEE countries, are saddled with extensive external deficits financed by consumer and business credit denominated in Euros. It is not difficult to see that this represents a regular vice from which it will be very difficult to escape since as long as the peg remains deflation seems the only painful alternative as a mean of correcting.<br /><br />(...)<br /><br />Another point which is specifically tied to Eastern Europe is that if domestic nominal interest rate increase to keep up with inflation rates it will have a strong substitution effects towards Euro denominated loans. This can become a dangerous cocktail should the tide turn against the currencies. </blockquote><br /><br /><p>Now that the focus seems to be changing back again it appears to be a good time to revisit the situation</p><p>Within this global nexus of what exactly to do with inflation relative to growth, many Eastern European economies has so far opted to go for inflation by raising interest rates. At an initial glance this seems quite reasonable and in many ways the CEE central banks merely latched on to market sentiment and expectations that many emerging economies would seek to use nominal appreciation as a tool to flush out inflation.<br /></p><p>Consequently we have seen how both <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/6/16/ukraine-on-the-brink.html">Ukraine</a> and <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/6/16/ukraine-on-the-brink.html">Hungary </a>have chosen to loosen the peg to the Euro as well as other floating currencies in Eastern Europe have seen their yield advantage increase in an attempt to flush out inflation. This has not been without problems though or more specifically it is not clear that an appreciation of the currency is all for the good. Two points here would seem particularly important. One is the simple question of whether in fact an appreciation is deflationary in a world where capital flows, and in particular the hot kind, act strongly on yield. However, another point would be specifically tied to the situation in Eastern Europe. As such, nominal appreciation of the currency also increases the purchasing power which is not what many CEE economies need at the present time as they stand before the task of correcting a rather large external balance. Moreover, rising domestic interest rates will increase and exacerbate the credit channel by which loans denominated in Euros and Swiss francs become more attractive. I have shown this to be true, for example, <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/4/26/foreign-credit-in-lithuania.html">in the context of Lithuania</a>. The important thing to do note here would what would happen to the servicing of these liabilities should the domestic currencies depreciate.<br /></p><p>What happens next then? Or more concretely, even though CEE currencies, in general, have enjoyed a rally on the back of market expectations of nominal appreciation fed by hawkish central banks what happens if and when central banks reverese course?<br /></p><p>An initial warning shot across the bow was handed to us as the governor of the Czech central bank mused that he might lower rates come next meeting due to the strenght of the Koruna and the subsequent effect on exports. <a href="http://polandeconomy.blogspot.com/2008/07/polands-central-bank-maintains-interest.html">Also Poland</a> recently opted to abandon the hawkish stance as rates were kept steady. In light of this event <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/4/26/foreign-credit-in-lithuania.html">Macro Man</a> managed, as ever, to hit the proverbial nail on the head.<br /></p><br /><br /><blockquote>There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way.</blockquote><br /><br />This is exactly the issue which now confronts many Eastern European economies. What to do as growth visibly tanks at one at the same time as inflation stays high. One thing here would be for the central banks to hold their raising cycle which in itself should ease the pace of appreciation but what if they need to lower rates.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhViMKukZeW8REMJ3TOeQJgZaR_4uDPFg6TbMgBv_h78OEpRiKGByxMeNfVCymPWU8UI8nYu0mDzBl8LnzvyCtxMzpUBBWH_JFJaxqBtMEtHfKf-l4Tu1-fNhP9OQGIQu0R_Mhqth09e9Ln/s1600-h/claus+1.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhViMKukZeW8REMJ3TOeQJgZaR_4uDPFg6TbMgBv_h78OEpRiKGByxMeNfVCymPWU8UI8nYu0mDzBl8LnzvyCtxMzpUBBWH_JFJaxqBtMEtHfKf-l4Tu1-fNhP9OQGIQu0R_Mhqth09e9Ln/s320/claus+1.jpg" alt="" id="BLOGGER_PHOTO_ID_5231388789579751298" border="0" /></a><br /><br />Now the numbers above do not, in themselves tell anything remotely interesting. For one, the difference between the economies are quite big. For example the Czech Republic has been able to gain, with a comparatively low interest rate, currency appreciation which <a href="http://www.bloomberg.com/apps/news?pid=20601095&sid=a5Rrl1ETaU2M&refer=east_europe">has actually helped the external balance</a> in so far as it has made imports cheaper. Obviously, at this point the benign effect on the trade balance is just as much down to decreasing domestic demand as the value shield of a dear currency. On the other hand, if we consider especially Ukraine, Romania, and Hungary the price has been dearer and the subsequent effect on inflation less pronounced. One could always argue that the situation would have been much worse, but one thing is certain; the ensuing loss of competitiveness has not been compensated for with a decrease in inflation. And one has to wonder whether pushing nominal interest rates ever higher would be a sound solution.<br /><p> The key here is that these high interest rates carry with them a high lock-in premium which makes it difficult to reduce them without causing substantial pain to the currency. Add to this that as long as interest rates stay in this territory the incentive to borrow in foreign currency remains very appealing. In fact, the incentive structure here is quite disruptive as many of these economies have higher rates on domestic currency deposits and lower rates on foreign credit. This incites consumers and companies to place their deposits in local currency while funding themselves in foreign currency. Finally, there is of course the more standard economics 1-0-1 point that whatever nominal rate is ascribed to a currency and an economy the latter needs to be able to provide the structural demand for which to satisfy the yield. Otherwise you just pour more gasoline on an already raging bonfire.<br /></p><p>Obviously, as long as the local currency remains strong and on an upwards march or the trading band is kept in place the show goes on. But the longer this structure lingers the more difficult it will be to break free; and break free they must since I am quite sure that Eurozone membership is off, for the immediate future at least. </p><p>Another more hard hitting point would simply be that whatever growth momentum these economies had going into 2008 it is now steadily levelling off. Now, these economies need to rebalance their external accounts at the same time as they labour under the yoke of slowing growth, high interest rates which are difficult to reduce and/or a quasi fixed exchange rate to the Euro. Can you feel the chilling cold of deflation blowing across the Urals? I can.<br /></p><p>Basically, the past years' rapid process of nominal convergence will now need to be kicked into reverse, since it is quite obvious that many CEE economies have been riding a blade too tough. <strong><br /></strong></p><p><strong>Be Careful Indeed<br /></strong></p><p>Last time I massaged this specific topic I summarised by ominously stating that the CEE economies and their central banks <em>should be careful what they wished for</em> in terms of using higher interest rates and subsequent nominal appreciation of their currencies to flush out inflation. The key point was that the effect would likely be limited and only further worsen the imbalances in the economies. And thus, here we are.<br /></p><p>Another more subtle point in the context of market reactions would be the boomerang effect which comes from the currency appreciation as interest rates are increased (and the peg/band abandoned) to the subsequent plunge when the economic tide turns. In line with the change in global sentiment towards growth and deflation (see e.g. <a href="http://polandeconomy.blogspot.com/2008/07/polands-central-bank-maintains-interest.html">here</a>) and the fact that other hitherto strong yielders (e.g. the <a href="http://macro-man.blogspot.com/2008/07/just-say-no.html">Kiwi</a> and <a href="http://www.bloomberg.com/apps/news?pid=20601068&sid=aVnHDpQswRWA&refer=economy">Aussie</a>) are beginning to falter we may be at an inflection point in the whole discourse of upwards movement in CEE currencies. <a href="http://www.morganstanley.com/views/gef/archive/2008/20080801-Fri.html">Stephen Jen's recent tour</a> of global FX markets is a fine addition to this argument.<br /></p><p>As ever, this is obviously still a dilemma for most of these economies since inflation continues to rage ahead. <a href="http://www.bloomberg.com/apps/news?pid=20601095&sid=aOMAom.6wVGU&refer=east_europe">In Romania</a> for example the PPI rose at its highest pace since 2004. However, as long as the credit tap stays open and as long as the purchasing power is increasing so will the the demands for higher wages stay strong. This is particularly true in the context of the CEE economies as these are in possession of structurally broken population pyramids after two decades worth of lowest low fertility and, in the cast of the latter decade, net outward migration.<br /></p><p>The main point I would like to emphasise here is that correction is coming and that it will only become harder the higher the currencies move upwards. In a more general light this correction will not be a small one and it most certainly will not be felt exclusively in Eastern Europe. Basically, the big hidden data point in all of this is the dependence of Germany on CEE imports. So far, this has moved along just nicely but Germany is in for a rude awakening once the link breaks ... and break, I am afraid, it will.<br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-81543536358917013502008-08-05T05:15:00.000-07:002008-08-05T05:53:17.298-07:00Romania Wages Accelerate To An Annual 24.4% In JuneRomanian annual wage growth, which prompted the central bank to raise the European Union's highest interest rates last week, accelerated to 24.4 percent in June as investment boosted demand for workers. Net monthly wages rose to 1,273 lei ($564) in June, the Bucharest-based National Statistics Institute said in an e-mail today. Growth accelerated from an annual 23.3 percent in May, while wages rose a monthly 2 percent. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijY6GGWvi4dHEvJYGTKKD3aZ_BCxs7A1D685pMLIAuavHx9ce_NhMdjEl2MrPZA0TVZtcvMVhL2dRK1gLAk2idxaTN9mJmLhPJ-GaXe4mUJ_G_Zn7GIYBkFwVin_jqDYDmK_0g3Jc4s41a/s1600-h/romania+wages.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijY6GGWvi4dHEvJYGTKKD3aZ_BCxs7A1D685pMLIAuavHx9ce_NhMdjEl2MrPZA0TVZtcvMVhL2dRK1gLAk2idxaTN9mJmLhPJ-GaXe4mUJ_G_Zn7GIYBkFwVin_jqDYDmK_0g3Jc4s41a/s320/romania+wages.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5231011808930986786" /></a><br /><br />Central bank Governor Mugur Isarescu said yesterday that wages are rising too fast, helping boost the inflation rate above 9.1 percent in July and outstripping productivity gains, while the economy is ``obviously overheating.'' The central bank on July 31 raised its Monetary Policy Rate a seventh time to 10.25 percent. <br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s1600-h/romania+central+bank.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s320/romania+central+bank.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5229154029652023058" /></a> <br /><br />Romania's entry to the EU last year set off labor migration to Italy, Spain and other bloc members, aggravating a labor shortage and further increasing wages. The remittances they send home on a monthly basis has also boosted demand for workers inside Romania. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNagb4GPeMw27tf5VQXUlZU0bu19se6FIysX4WthCNfRj9iXyIA50x9CNnkuFI0VCCm7VUrCZhyphenhyphen2YmqZv2yqpJFdY-GDWWFF__QCCqW1wqm9Tv-c7Hikdz10ubVwbp9c321ud0nh7u6926/s1600-h/romanians+in+spain.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNagb4GPeMw27tf5VQXUlZU0bu19se6FIysX4WthCNfRj9iXyIA50x9CNnkuFI0VCCm7VUrCZhyphenhyphen2YmqZv2yqpJFdY-GDWWFF__QCCqW1wqm9Tv-c7Hikdz10ubVwbp9c321ud0nh7u6926/s320/romanians+in+spain.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5231015052121556706" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7PL6vpJS3npwNgxdUNgnKZIUSnV701MoIWi1oUA53R_HE2UHOfnaCO0ucOh_iwoMS7xfypgwrsk6oXdzlVoLttEs9hyphenhyphenwbqLuX2pUV4S-oeZzy5fIt4MFF91-tpGSyVrTkf3kCDEbL_soM/s1600-h/romanians+in+italy.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7PL6vpJS3npwNgxdUNgnKZIUSnV701MoIWi1oUA53R_HE2UHOfnaCO0ucOh_iwoMS7xfypgwrsk6oXdzlVoLttEs9hyphenhyphenwbqLuX2pUV4S-oeZzy5fIt4MFF91-tpGSyVrTkf3kCDEbL_soM/s320/romanians+in+italy.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5231015774742596834" /></a><br /><br />Unemployment in June was 3.8 percent, the lowest rate in 16 years, the National Labor Agency said on July 10. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjw0sqRRwrfItvXikijf-3arNvEtxI_mufvc7pRffIZFBNiUNvekjLC7agRaJdDz_2f4Gt_BqTE8sYXs0WgEOGhZlflPKSS0Va0ourpfnzXplkihwVCVzKXWemEKzhrxIthAikblWNPCeM-/s1600-h/romania+unemployment.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjw0sqRRwrfItvXikijf-3arNvEtxI_mufvc7pRffIZFBNiUNvekjLC7agRaJdDz_2f4Gt_BqTE8sYXs0WgEOGhZlflPKSS0Va0ourpfnzXplkihwVCVzKXWemEKzhrxIthAikblWNPCeM-/s320/romania+unemployment.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5231013924882959778" /></a><br /><br /><br />Higher paychecks are also helping spark a lending boom as Romanians exercise their increased borrowing power. At end-June 2008, total non-government credit was up year on year by 63.4 percent, or 50.5 percent in real terms, on the back of the 40.0 percent increase in RON-denominated loans (28.9 percent in real terms) and the 89.3 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 62.7 percent). <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh71nRTTPnrRzbErgFRQWK8Zb8NbQvKuNXIhsCH_jbCyZN2uts2aPFZAed5l7T6FiMJ4FwWCVHhlUpW3ob-CFUfSTeNO2SQsFrBnZn9An6vXWvM98jxno5zxZDWjECUZxwcdsP-S75tgkH/s1600-h/romania+creit+2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh71nRTTPnrRzbErgFRQWK8Zb8NbQvKuNXIhsCH_jbCyZN2uts2aPFZAed5l7T6FiMJ4FwWCVHhlUpW3ob-CFUfSTeNO2SQsFrBnZn9An6vXWvM98jxno5zxZDWjECUZxwcdsP-S75tgkH/s320/romania+creit+2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5228508311150950722" /></a><br /><br />Romania's construction industry, including commercial and engineering works, expanded an annual 34 percent in May, the fastest pace in the EU, the institute said on July 4. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvCU9qBc0pE3hNBDc3SlhyJcAcB7XawX7IaLP7u5HFT93O7Tx0hds53ooUMyHdYZZdXUZP6LtouLdl43kxE3WdUILHw4y4SrIMK589KEmks0RL2WZ94v9k6pIc4WVKyh7vgWJC_gCLKBlg/s1600-h/romania+credit.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvCU9qBc0pE3hNBDc3SlhyJcAcB7XawX7IaLP7u5HFT93O7Tx0hds53ooUMyHdYZZdXUZP6LtouLdl43kxE3WdUILHw4y4SrIMK589KEmks0RL2WZ94v9k6pIc4WVKyh7vgWJC_gCLKBlg/s320/romania+credit.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5228505670092027154" /></a><br /><br />The Romanian Association of Construction Companies has said builders, who employ 300,000 workers in the nation of 22 million, need another 300,000 workers just to stay on scheduled with current projects.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-14174847389114878202008-08-04T03:02:00.000-07:002008-08-04T03:14:14.292-07:00Romanian Producer Prices Accelerate Again In JuneRomanian producer prices rose at the fastest pace in over three years in June as energy prices increased and rising wages hit output costs. The cost of goods produced in factories and mines rose an annual 19.4 percent in June, compared with 16.8 percent in May, the fastest pace since October of 2004. Prices grew 2.1 percent on the month, after rising 1.7 percent in May. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpDyyJjYENcEGiNMTycZdVsI0svFohUKLIoCnQtE1-Ta4KFCWTvzGd35rapgaEVYbEFYh3WDKVxyqgVYUi4F-9Su9W9oll8pHPj5smWg_inHJTLF6qfcFR-6OypRbQiFLRmNDhM_CkIINX/s1600-h/romania+pp.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpDyyJjYENcEGiNMTycZdVsI0svFohUKLIoCnQtE1-Ta4KFCWTvzGd35rapgaEVYbEFYh3WDKVxyqgVYUi4F-9Su9W9oll8pHPj5smWg_inHJTLF6qfcFR-6OypRbQiFLRmNDhM_CkIINX/s320/romania+pp.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5230602399474851234" /></a><br /><br /><br />Prices of manufactured goods rose an annual 22.1 percent in June, compared with 19.6 percent in May, while price growth in the mining and drilling industries quickened to 17.8 percent from 11 percent. The costs of electricity, natural gas and water rose an average of 0.1 percent, compared with 3 percent in May, the statistics institute said. <br /><br />The Banca Nationala a Romaniei last week raised its main interest rate, the highest in the European Union, to 10.25 percent from 10 percent. Monetary policy makers have gradually raised the rate from 7 percent in September.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s1600-h/romania+central+bank.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s320/romania+central+bank.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5229154029652023058" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-48783444818214322252008-07-31T05:24:00.000-07:002008-07-31T05:31:07.833-07:00Romania's Central Bank Raises Interest RatesRomania's central bank raised its main interest rate, the European Union's highest, again today to 10.25 percent. The Banca Nationala a Romaniei raised the rate for the seventh consecutive policy meeting as it expects inflation to have accelerated in July from June's two-year high. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s1600-h/romania+central+bank.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaxURKw3apssaPS9isLrcLhaWXDSnCYBIj6GZ84_rWaNYYaEaz72yaL0EnpT5WGo-KQn9YqqIAWb0F4edO30MfKUNT5AVyKf7g8LOVKZ_5odceS93hxXzu_VqSzKqx16onsMCaszLw8pSG/s320/romania+central+bank.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5229154029652023058" /></a> <br /><br />A drought last year destroyed a third of Romania's crops, adding to pressure from increasing global food prices and boosting inflation from a 17-year-low of 3.7 percent in March, 2007. The bank has now raised the key rate in stages from 7%. <br /><br />The leu strengthened as much as 0.4 percent to 3.5138 to the euro after the announcement, from 3.5276 at closing yesterday. The benchmark BET stock index was little changed at 6045.04. <br /><br /><br />The central bank had previously predicted inflation may slow as early as August as an expected bumper crop counters rising food prices. Central banks in emerging economies, including Brazil, Russia and Turkey raised interest rates this month to stem the effects of surging oil and food prices. The European Central bank on July 3 raised its benchmark lending rate by a quarter point to 4.25 percent, the highest in seven years. <br /><br />Several east European central banks, including monetary policy makers in Poland and Serbia, are taking stock of their moves to see if they hit their intended target. Slovakia held its main rate on Tuesday and the Czech Republic is expected to do the same next Thursday. <br /><br />Romania's annual net-wage growth of 23.3 percent in May and a 63.4 percent increase in private lending in June have also pressured prices and boosted economic growth.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-918478938386753900.post-53256697527805140642008-07-29T11:32:00.000-07:002008-07-29T12:02:05.603-07:00Construction and Forex Lending Still Booming In RomaniaRomanians were awarded 6 percent more homebuilding permits in June than in June 2007 as higher wages and a lending boom continued to drive construction activity. The government issued 6,137 homebuilding permits last month, compared with 5,791 in June 2007, according to the latest data from the National Statistics Institute. Month on month permits awarded were down 2.4 percent from May. <br /><br />Rising wages, a lending boom and growth in real estate prices have given Romanians more money to invest in housing. Wages increased an annual 23.3 percent in May: <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVNZVh5qXEJd2SY6EXYaJ0pCzXPXzYcDefSCw6mhn_zWZz0xW2YZxr4dnrnERX8RKUriifb1n9suefQyFv7m4-Wim6lks4W2xZcVYdBp7rdcTTMSJYW4syje85qaRTjrdVOXgUk40tUEMD/s1600-h/romanian+wage+rises.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVNZVh5qXEJd2SY6EXYaJ0pCzXPXzYcDefSCw6mhn_zWZz0xW2YZxr4dnrnERX8RKUriifb1n9suefQyFv7m4-Wim6lks4W2xZcVYdBp7rdcTTMSJYW4syje85qaRTjrdVOXgUk40tUEMD/s320/romanian+wage+rises.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5220260935419540866" /></a><br /><br />Bank lending continued to drive up debt - both corporate and household - at a very fast annual rate again in June, according to the latest data from the Romanian central bank. <br /><br />In June 2008, totat non-government credit grew 3.7 percent, or 3.4 percent in real terms, from May 2008 to reach RON 178,180.2 million. RON-denominated loans went up 2.1 percent (1.8 percent in real terms) and foreign currency-denominated loans rose by 5.0 percent when expressed in RON and by 4.3 percent when expressed in EUR. <br /><br />At end-June 2008, total non-government credit was up year on year by 63.4 percent, or 50.5 percent in real terms, on the back of the 40.0 percent increase in RON-denominated loans (28.9 percent in real terms) and the 89.3 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 62.7 percent). <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh71nRTTPnrRzbErgFRQWK8Zb8NbQvKuNXIhsCH_jbCyZN2uts2aPFZAed5l7T6FiMJ4FwWCVHhlUpW3ob-CFUfSTeNO2SQsFrBnZn9An6vXWvM98jxno5zxZDWjECUZxwcdsP-S75tgkH/s1600-h/romania+creit+2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh71nRTTPnrRzbErgFRQWK8Zb8NbQvKuNXIhsCH_jbCyZN2uts2aPFZAed5l7T6FiMJ4FwWCVHhlUpW3ob-CFUfSTeNO2SQsFrBnZn9An6vXWvM98jxno5zxZDWjECUZxwcdsP-S75tgkH/s320/romania+creit+2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5228508311150950722" /></a><br /><br />Romania's construction industry, including commercial and engineering works, expanded an annual 34 percent in May, the fastest pace in the EU, the institute said on July 4. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvCU9qBc0pE3hNBDc3SlhyJcAcB7XawX7IaLP7u5HFT93O7Tx0hds53ooUMyHdYZZdXUZP6LtouLdl43kxE3WdUILHw4y4SrIMK589KEmks0RL2WZ94v9k6pIc4WVKyh7vgWJC_gCLKBlg/s1600-h/romania+credit.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvCU9qBc0pE3hNBDc3SlhyJcAcB7XawX7IaLP7u5HFT93O7Tx0hds53ooUMyHdYZZdXUZP6LtouLdl43kxE3WdUILHw4y4SrIMK589KEmks0RL2WZ94v9k6pIc4WVKyh7vgWJC_gCLKBlg/s320/romania+credit.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5228505670092027154" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-39802221805315018012008-07-16T05:40:00.000-07:002008-07-16T05:42:10.156-07:00Romania's Current Account Deficit Widens in May 2008Romania's current-account deficit widened in the first five months of the year as rising wages and a lending boom encouraged citizens to buy more imported goods. The gap widened to 6.53 billion euros ($10 billion) from 5.88 billion euros in the same period of last year, according to the Bucharest-based Banca Nationala a Romaniei earlier today. <br /><br />A lending boom, which saw private debt shoot up by more than an annual 61 percent in May, and annual net wage increases of 23.3 percent in that month encouraged Romanians to buy more imports, widening the trade and current-account gaps. <br /><br />The European Union has warned Romania to narrow the gaps or risk instability of the local currency because of global economic uncertainty. Fitch Ratings and Standard & Poor's have lowered their outlooks on Romania's credit rating, citing the deficits. <br /><br />The trade deficit, the main component of the current-account gap, widened to 6.9 billion euros in the first five months of the year from 6 billion euros a year earlier, the National Statistics Institute said on June 9. <br /><br />Net money transfers to Romania, mainly from the estimated 2 million citizens living abroad, increased to 2.25 billion euros in the first five months from 1.88 billion euros a year earlier, the central bank said today. <br /><br />The services component of the gap, including tourism and transportation, saw a net inflow of 194 million euros, from an inflow of 422 million euros a year earlier. <br /><br />Foreign direct investment in the first five months totaled 4.1 billion euros, compared with 2.1 billion euros in the same period of last year, the bank said.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-76949679730850055182008-07-11T14:29:00.000-07:002008-07-12T07:48:46.274-07:00Romania Inflation Rises Again in June 2008Romania's inflation rate rose in June, and pushed back up the two-year high reached in June. Inflation accelerated to 8.6 percent from 8.5 percent in May according to data last week fromthe Bucharest-based National Statistics Institute. On the month, prices rose 0.3 percent, compared with 0.5 percent in May.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm7teMv3vSbDAqOCvrox6PiQDAQ5RK8yqaE__bMEQvVpAC-Rm5rtns9Uf-wYXSt-89eejbv9kJbFsMEb3ZfUmo88n2giTfkFIBz9w5GjE3772hrUwo7PwSAtFTODXnTNhKHLjeAsx0Qrf1/s1600-h/romania+CPI.jpg"><img id="BLOGGER_PHOTO_ID_5221872749548816466" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm7teMv3vSbDAqOCvrox6PiQDAQ5RK8yqaE__bMEQvVpAC-Rm5rtns9Uf-wYXSt-89eejbv9kJbFsMEb3ZfUmo88n2giTfkFIBz9w5GjE3772hrUwo7PwSAtFTODXnTNhKHLjeAsx0Qrf1/s320/romania+CPI.jpg" border="0" /></a><br /><br />Inflation has now accelerated from a post-communist low of 3.7 percent in March 2007 and the central bank has raised the main interest rate at every policy meeting since October - to the current level of 10 percent, the highest in the European Union. The bank, which next meets on July 31, has forecast inflation will slow starting in August.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6N0cNz0GNy9ZzHrBpbFLcBwFWcfpCp8LRqo3QAUtE8kW2zbehFMwCkhcSKhgKEUIZ3gniG0R7gA6pZ70SPVCvfujn2Zlgy2yHzbuQodjlUvxkBqAWovi7-olOcCimP7jgPcJwX3Ub3MTC/s1600-h/romania+interest+rate.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6N0cNz0GNy9ZzHrBpbFLcBwFWcfpCp8LRqo3QAUtE8kW2zbehFMwCkhcSKhgKEUIZ3gniG0R7gA6pZ70SPVCvfujn2Zlgy2yHzbuQodjlUvxkBqAWovi7-olOcCimP7jgPcJwX3Ub3MTC/s320/romania+interest+rate.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5216230949794525778" /></a><br /><br /><br />Food prices are accelerating worldwide, pushing up inflation particularly in eastern Europe and other emerging markets, where people spend a larger portion of their income on food. Latvian inflation was 17.7 percent in June and Ukraine's was 29.3 percent.<br /><br />Food prices in Romania were up 11.8 percent year on year while non-food items rose 5.9 percent. Services rose an annual 8.7 percent. And the immediate future looks non too promising on the inflation front, since gas prices are about to rise 12.5 percent and electricity prices 5.3 percent effective July 1. The government has also just raised the tobacco tax to 50 euros per 1,000 cigarettes from 41.5 euros.<br /><br /><br />However there are some positive trends, agriculture, for example. Farm output will probably double this year over 2007 due to better weather and increasing investment. Agriculture accounted for 9.4 percent of all investment in the first quarter, compared with 1.5 percent in Q1 2007.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-47288128085970613002008-07-07T02:46:00.000-07:002008-07-29T12:02:17.684-07:00Romanian Wages Rise 23.3% in May 2008Romanian net wages grew an annual 23.3 percent in May as increasing labor shortage lead to higher salaries and increased investment raised demand for workers. The average net monthly wage rose to 1,248 lei ($539), according to today's data from the Bucharest-based National Statistics Institute. The rate of increase was close to the 24.8 percent annual increase registered in April. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVNZVh5qXEJd2SY6EXYaJ0pCzXPXzYcDefSCw6mhn_zWZz0xW2YZxr4dnrnERX8RKUriifb1n9suefQyFv7m4-Wim6lks4W2xZcVYdBp7rdcTTMSJYW4syje85qaRTjrdVOXgUk40tUEMD/s1600-h/romanian+wage+rises.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVNZVh5qXEJd2SY6EXYaJ0pCzXPXzYcDefSCw6mhn_zWZz0xW2YZxr4dnrnERX8RKUriifb1n9suefQyFv7m4-Wim6lks4W2xZcVYdBp7rdcTTMSJYW4syje85qaRTjrdVOXgUk40tUEMD/s320/romanian+wage+rises.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5220260935419540866" /></a><br /><br />Romania's entry to the European Union 18 months ago sparked an increase in labor migration to western Europe, particularly to Spain and Italy, aggravating difficulties which were inevitably going to arise from the long term below replacement fertility the country has experienced. At the same time a boom in consumption and construction fuelled in part by remittances these very same migrant workers sent home has boosted demand for workers who just aren't available. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBmefD8Q8FSzIfORaGIutYGaw98d_6CknthGFh0KFa-mSYCnOCdasg3jnaF20UltqTimcP1RqCknylLuEYfrAo-Kg2eAljuNhksEPC1NolpCWbVaCbdybswj2bik-QjftSK0qRzvpB5jea/s1600-h/romania+unemployed.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBmefD8Q8FSzIfORaGIutYGaw98d_6CknthGFh0KFa-mSYCnOCdasg3jnaF20UltqTimcP1RqCknylLuEYfrAo-Kg2eAljuNhksEPC1NolpCWbVaCbdybswj2bik-QjftSK0qRzvpB5jea/s320/romania+unemployed.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5220264676613733794" /></a><br /><br />The Banca Nationala a Romaniei said wage growth is a main factor in inflation and is encouraging a lending boom as citizens' borrowing power expands. The central bank has increased its main interest rate at every meeting since October to slow inflation, which was close to the fastest pace in two years in May, at 8.5 percent. <br /><br />Romanian unemployment fell to 3.8 percent in May, from the 5.2 percent level which prevailed when Romania joined the EU. The Romanian Association of Construction Companies has said builders need another 300,000 workers simply to stay on schedule with current projects.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgo1vLAr19hlLZjafZb4uxW7SmT7Oz5wkNCPMVELu8NrIdKEA8sZ0Cu_oU9mIU3fmyepExqTp61xRQr0MyOnLY4GFDll5OP6a2KJWqzUyed23BXi5AEi6FzPDPG9t9agWAQtBt_gPmxo7yj/s1600-h/romania+unemployemnt.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgo1vLAr19hlLZjafZb4uxW7SmT7Oz5wkNCPMVELu8NrIdKEA8sZ0Cu_oU9mIU3fmyepExqTp61xRQr0MyOnLY4GFDll5OP6a2KJWqzUyed23BXi5AEi6FzPDPG9t9agWAQtBt_gPmxo7yj/s320/romania+unemployemnt.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5220264748179484498" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-66437214772575484452008-07-04T06:44:00.000-07:002008-07-04T06:52:35.732-07:00Romania Construction Output May 2008Romania's construction industry, which is currently the fastest-growing in the European Union, gathered additional steam in May as investors built offices and shops and rising wages spurred homebuilding. The value of construction works rose an annual 34 percent in May, compared with 31 percent in April according to data released by the National Statistics Institute this morning. Construction output was up 10.5 percent month on month. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD3-SDZo9b5EEaerzMBpQYUGgDuiTe47wVi9bk_kuoRRc0vjpoaHCkUHfRnCSINkoz_YoI3aeedjUiMogxsdBJzIO_35gpN-gtoL5sCS1EiFHK6W-i3OdeGF_4vArZ2g3u8IpXJz6gFBBa/s1600-h/romania+construction.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD3-SDZo9b5EEaerzMBpQYUGgDuiTe47wVi9bk_kuoRRc0vjpoaHCkUHfRnCSINkoz_YoI3aeedjUiMogxsdBJzIO_35gpN-gtoL5sCS1EiFHK6W-i3OdeGF_4vArZ2g3u8IpXJz6gFBBa/s320/romania+construction.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5219154559099594722" /></a><br /><br />Homebuilding jumped an annual 36 percent in May as rising wages and a lending boom encouraged Romanians to invest more in residential property. Net wages rose 25 percent on the year in April.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLRz9i9cXxpgfDByheoszypdtzl8g1sCT09HO_NBsUOXAyEOutdO66Vnyh0JyWsWFxuITpDJkFEJQ5NTjReFwcaOMrcSEpddt-COtFvCs0kUNAIxpoLOHYbS9cjIXmuwhHhvJ1ehPC3E5z/s1600-h/romania+quarterly+wages.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLRz9i9cXxpgfDByheoszypdtzl8g1sCT09HO_NBsUOXAyEOutdO66Vnyh0JyWsWFxuITpDJkFEJQ5NTjReFwcaOMrcSEpddt-COtFvCs0kUNAIxpoLOHYbS9cjIXmuwhHhvJ1ehPC3E5z/s320/romania+quarterly+wages.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5204656250584155106" /></a><br /><br /><br />Private debt grew by 61 percent in May, the central bank said on June 24. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFxh11J3EDwQwVDdwTuyxWv88V-gJLqHYp4FkSiSBN0JJzgby8XxGXhe2PyVlexjiJ6dprakG09GTum3mREyty4JmT3Nxt8qMQ-Okk642Qr0IXokG9B_JhK-7qME8OdP41kAsfD0gcztoX/s1600-h/forex+yoy.jpg"><img id="BLOGGER_PHOTO_ID_5218488953250534338" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFxh11J3EDwQwVDdwTuyxWv88V-gJLqHYp4FkSiSBN0JJzgby8XxGXhe2PyVlexjiJ6dprakG09GTum3mREyty4JmT3Nxt8qMQ-Okk642Qr0IXokG9B_JhK-7qME8OdP41kAsfD0gcztoX/s320/forex+yoy.jpg" border="0" /></a><br /><br />Construction in the first quarter contributed strongly to a year on year economic growth rate of 8.2 percent pace, the second-fastest in the EU after Slovakia. Construction accounted for 1.5 percentage points of the growth. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjcAvnst7VL46BmwWWDqLo2dnVEnNW_rBzbl3qEB8gceGyUbwsexsrzuLk-g1Sq0T0DkwDRA6r04Ntw-XTYJRV4ZCr1QmPyzHM8_-ovFrdinRkpmPlaj7zuemvQga2FiwGaAGw-dNYrtlE/s1600-h/romania+GDP.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjcAvnst7VL46BmwWWDqLo2dnVEnNW_rBzbl3qEB8gceGyUbwsexsrzuLk-g1Sq0T0DkwDRA6r04Ntw-XTYJRV4ZCr1QmPyzHM8_-ovFrdinRkpmPlaj7zuemvQga2FiwGaAGw-dNYrtlE/s320/romania+GDP.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5207383841461398802" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-88256437868212246042008-07-02T03:41:00.000-07:002008-07-02T12:32:49.393-07:00Romania Producer Prices April 2008Romanian producer prices rose at the fastest annual pace since November 2004 in April as rising energy prices and a weaker local currency increased the cost of imported materials. The cost of goods leaving Romanias factories and mines rose at an annual 16.8 percent rate in May, compared with 15.5 percent in April, according to dat from the National Statistics Institute today. Prices rose 1.7 percent on the month, after a gain of 1.1 percent in April.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT9_uyo8Ycv0i9m8ddTwBHm7G1GmIsfM8AivKfDYlEMQKvzZc0REib5xgWG6ByFwOpniHTI5WK2lio69Mw9x-ccmyfDoCEtSdHSWDuhvY1nn1BNPWauCn6aS2FcUYqD6jZfbxzWRO0qYuq/s1600-h/romania+PPI.jpg"><img id="BLOGGER_PHOTO_ID_5218460750944435698" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT9_uyo8Ycv0i9m8ddTwBHm7G1GmIsfM8AivKfDYlEMQKvzZc0REib5xgWG6ByFwOpniHTI5WK2lio69Mw9x-ccmyfDoCEtSdHSWDuhvY1nn1BNPWauCn6aS2FcUYqD6jZfbxzWRO0qYuq/s320/romania+PPI.jpg" border="0" /></a><br /><br />The leu has weakened almost 15 percent against the euro in the past year, making imports of capital goods and raw materials more expensive. Higher global energy prices also increased costs for producers. Producer-price growth is an early indicator of inflation, which in May was 8.5 percent, more than twice the pace of the euro region.<br /><br />Prices of manufactured goods rose an annual 19.6 percent in May, compared with 17.7 percent in April, while price growth in the mining and drilling industries slowed to 11 percent from 13.2 percent. The costs of electricity, natural gas and water rose an average of 3 percent, compared with 2.9 percent in April, the statistics institute said.<br /><br />In another indication of the growing stresses and strains which are now accumulating in the Romanian economy, we learnt today that overdue private debt almost doubled in April from a year earlier as the local currency weakened, making loans in euros more expensive to repay. Loan payments that are more than 30 days overdue rose to 691 million lei ($300 million) in April from 380 million lei a year earlier, according to the Banca Nationala a Romaniei.<br /><br />Private debt in Romania rose an annual 61.3 percent in May from a year earlier in a lending boom spurred by rising wages and competition among banks, the central bank said on June 24. Borrowing in euros accounted for most of the lending.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikjLKQJwCvzaXZJL715CTr3GkfNpH78dY7JUz-GC3XKkdyf3sV5X8oP0KODC7ugaQKeyIyMe_QEMGUT-OWlNylLJoduwlGpyEpd9RYn2DqZXZpm_cvTypxWF_G2wuLC2qrGImLT2dHugk0/s1600-h/romania+non+govt+credit.jpg"><img id="BLOGGER_PHOTO_ID_5218476781811918802" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikjLKQJwCvzaXZJL715CTr3GkfNpH78dY7JUz-GC3XKkdyf3sV5X8oP0KODC7ugaQKeyIyMe_QEMGUT-OWlNylLJoduwlGpyEpd9RYn2DqZXZpm_cvTypxWF_G2wuLC2qrGImLT2dHugk0/s320/romania+non+govt+credit.jpg" border="0" /></a><br /><br />In May 2008, non-government credit grew 1.8 percent, or 1.3 percent in real terms, versus April 2008 to RON 171,834.3 million. RON-denominated loans went up 2.4 percent (1.9 percent in real terms) and foreign currency-denominated loans rose by 1.4 percent when expressed in RON and by 2.9 percent when expressed in EUR. At end-May 2008, non-government credit climbed year on year by 61.3 percent, or 48.8 percent in real terms, on the back of the 41.7 percent increase in RON-denominated loans (30.6 percent in real terms) and the 82.6 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 65.0 percent).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcEXD3qcVtjjPhV-8qJ8-jOE73oiQ4dqdyFpHQ79E1NUIPIBPsoG0IxuuElTc3up4w7KPZ2V5nMizh9Mt4NvsKdQBIhTtbSAroxAhedK0jCfACzceyodoKzKywu-6zvzNOPcY3p1mYjLtp/s1600-h/romania+household+credit.jpg"><img id="BLOGGER_PHOTO_ID_5218477380508805266" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcEXD3qcVtjjPhV-8qJ8-jOE73oiQ4dqdyFpHQ79E1NUIPIBPsoG0IxuuElTc3up4w7KPZ2V5nMizh9Mt4NvsKdQBIhTtbSAroxAhedK0jCfACzceyodoKzKywu-6zvzNOPcY3p1mYjLtp/s320/romania+household+credit.jpg" border="0" /></a> If we look at the annual rates of increase in loans and forex loans (see chart below) we can see that the rate of increase in RON denominated household has been falling slowly now for some time, but that the rate of increase in Total Forex loans and Household Forex was very very fast, but peaked in January, and is now declining. This could mean that the lending boom has now past its peak, and that we are into the downside, if so we should start to see some reflection of this in real economy data in the not too distant future.</p><p><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFxh11J3EDwQwVDdwTuyxWv88V-gJLqHYp4FkSiSBN0JJzgby8XxGXhe2PyVlexjiJ6dprakG09GTum3mREyty4JmT3Nxt8qMQ-Okk642Qr0IXokG9B_JhK-7qME8OdP41kAsfD0gcztoX/s1600-h/forex+yoy.jpg"><img id="BLOGGER_PHOTO_ID_5218488953250534338" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFxh11J3EDwQwVDdwTuyxWv88V-gJLqHYp4FkSiSBN0JJzgby8XxGXhe2PyVlexjiJ6dprakG09GTum3mREyty4JmT3Nxt8qMQ-Okk642Qr0IXokG9B_JhK-7qME8OdP41kAsfD0gcztoX/s320/forex+yoy.jpg" border="0" /></a><br /><br /><br /><br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-918478938386753900.post-47433132952482456392008-06-26T04:35:00.000-07:002008-06-26T09:41:00.748-07:00Romanian Central Bank Raises Interest Rates Again In JuneRomania's central bank raised its main interest rate (currently the European Union's highest) for a sixth consecutive meeting today and indicated it may rates again again as rising global fuel prices and soaring local wages stoke inflation. <br /><br />The Banca Nationala a Romaniei raised its Monetary Policy Rate to 10 percent from 9.75 percent. The rate-setting board is ``ready to use the bank's entire array of instruments to counteract inflationary pressures and ensure disinflation will resume,'' the bank said in a statement. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6N0cNz0GNy9ZzHrBpbFLcBwFWcfpCp8LRqo3QAUtE8kW2zbehFMwCkhcSKhgKEUIZ3gniG0R7gA6pZ70SPVCvfujn2Zlgy2yHzbuQodjlUvxkBqAWovi7-olOcCimP7jgPcJwX3Ub3MTC/s1600-h/romania+interest+rate.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6N0cNz0GNy9ZzHrBpbFLcBwFWcfpCp8LRqo3QAUtE8kW2zbehFMwCkhcSKhgKEUIZ3gniG0R7gA6pZ70SPVCvfujn2Zlgy2yHzbuQodjlUvxkBqAWovi7-olOcCimP7jgPcJwX3Ub3MTC/s320/romania+interest+rate.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5216230949794525778" /></a><br /><br />The central bank today also left its minimum reserve requirement on commercial bank deposits at 40 percent for foreign-exchange deposits and 20 percent for deposits in lei. Monetary policy makers use the rate as a benchmark to drain excess cash from commercial banks through weekly auctions of one-month deposits and monthly auctions of three-month certificates of deposit to keep lending in check. <br /><br />Romanian monetary policy makers, who have targeted an inflation rate of 3 percent in 2010 (inflation was running at 8.5 percent in May) have raised the main interest rate at every meeting since October, when it was 7 percent. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRYpzRSOPZ-NID64kQlk5QlrbEmDondErgkYJ2m-XSMJ2eGf6Dxrw5AOQtQZjtXnkYeyGdlET8icIDbmTlK7Y3u1FFbb1XXiFJRRq3U05alXC7bF8VADf0rCFve2CyPn0uQ79tUsJ1a-qr/s1600-h/romania+CPI.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRYpzRSOPZ-NID64kQlk5QlrbEmDondErgkYJ2m-XSMJ2eGf6Dxrw5AOQtQZjtXnkYeyGdlET8icIDbmTlK7Y3u1FFbb1XXiFJRRq3U05alXC7bF8VADf0rCFve2CyPn0uQ79tUsJ1a-qr/s320/romania+CPI.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5210705417665733794" /></a><br /><br />Inflation is being driven by food and fuel prices, a forex dominated lending boom, rising local wages, higher government spending and a weaker local currency. <br /><br />The central bank is still targeting annual end-year inflation of between 3 percent and 5 percent for this year, and objective which currently seems unlikely to be attained. <br /><br />Romanian producer-prices, which are normally regarded as an early predictor of inflation, rose at close to their fastest pace since 2004 in April as energy prices increased a weaker leu raised the cost of imported raw materials. <br /><br />The cost of goods produced in factories and mines was up 15.5 percent in April over April 2007. This compares with a 15.6 percent rate in March, according to the latest data from the Bucharest-based National Statistics Institute. Prices rose 1.1 percent on the month, after rising 1.7 percent in March over February. <br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgjt9F4WCx6fx8pw5J96IVWR31zeOQSP1Q2NmHdoJjEeEuMfIYZV1E7WMJhg5eVzp8ScblGhMssiSWQQCZBe-HirEtkcMIDAq3-i77bPpNXaDEWw80RMBRfbUwNM20UiCB2r7ePzDvQQ1P/s1600-h/romania+PPI.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgjt9F4WCx6fx8pw5J96IVWR31zeOQSP1Q2NmHdoJjEeEuMfIYZV1E7WMJhg5eVzp8ScblGhMssiSWQQCZBe-HirEtkcMIDAq3-i77bPpNXaDEWw80RMBRfbUwNM20UiCB2r7ePzDvQQ1P/s320/romania+PPI.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5207563624497442162" /></a><br /><br /><br /><br />Economic growth this year may be as much as 8 percent, and may well be boosted by a good harvest this year following the drought which destroyed a third of Romania's crops in 2007. Gross domestic product grew an annual 8.2 percent in the first quarter, the second-fastest pace in the EU after Slovakia. <br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUWbWf2t8kvvxmiEhT3W701A3YW7FJ1F8AeQp3Tm7h74wR8Xbx1TNAO_z8pq63iSm2gLReakP5LE9WREHugZplIMFPD5pqMYA5ocJwbbCXwjdJ7fT8pqOYBXvxs9Nddu8R_02VB0gybqqk/s1600-h/romania+GDP.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUWbWf2t8kvvxmiEhT3W701A3YW7FJ1F8AeQp3Tm7h74wR8Xbx1TNAO_z8pq63iSm2gLReakP5LE9WREHugZplIMFPD5pqMYA5ocJwbbCXwjdJ7fT8pqOYBXvxs9Nddu8R_02VB0gybqqk/s320/romania+GDP.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5210705930065900882" /></a><br /><br />Romanian retail sales growth accelerated to the fastest pace in seven months in April as a lending boom and soaring wages continued to boost consumer spending. Sales rose an annual 26.6 percent, compared with 11.2 percent in March, according to the latest data from the Bucharest-based National Statistics Institute. Sales increased 15 percent on the month.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAdFXrCIyHYDc4dsgqKSLIScbs8-wUa78aePur9Tb1Pp6AYaoHsEjH7dQX7GskYpwFjgPgr9TjLQx79c8vns9Q4aPsqk3Y8fWjPk8cSUySBT39-2mX9fKLa5Xy3OhjIovq60NAsb7kTN8B/s1600-h/romanian+retail+sales.jpg"><img id="BLOGGER_PHOTO_ID_5208757003080718066" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAdFXrCIyHYDc4dsgqKSLIScbs8-wUa78aePur9Tb1Pp6AYaoHsEjH7dQX7GskYpwFjgPgr9TjLQx79c8vns9Q4aPsqk3Y8fWjPk8cSUySBT39-2mX9fKLa5Xy3OhjIovq60NAsb7kTN8B/s320/romanian+retail+sales.jpg" border="0" /></a><br /><br /><br />Growing consumer lending, rising wages and government spending are driving growth and are also key in boosting consumer prices, the central bank has said. <br /><br />Romanian net wage growth, which the central bank says is a main driver of inflation, accelerated in April due to growing labour shortages. The average monthly net wage increased 24.8 percent from a year earlier to 1,282 lei ($546), the Bucharest-based National Statistics Institute said today. Growth accelerated from an annual 17.7 percent in March. On the month, wages increased by 7.6 percent. In real terms wages are up 16.2% year on year, since inflation in April was running at 8.6%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_VAuuh2b8T3Qpbf3XUTo0BTcUGCW3jLm1KfdI9WGHQy8RpuKukt-MWh6PaBcAfvv5qZBa7H3hfvFqeNAALZkVUNmQ5t7zd9Kfa5jZ_UV1RgYMq25V2tSK8gVdUxByqWE9fdMW_Q6Q7_C7/s1600-h/romania+wages.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_VAuuh2b8T3Qpbf3XUTo0BTcUGCW3jLm1KfdI9WGHQy8RpuKukt-MWh6PaBcAfvv5qZBa7H3hfvFqeNAALZkVUNmQ5t7zd9Kfa5jZ_UV1RgYMq25V2tSK8gVdUxByqWE9fdMW_Q6Q7_C7/s320/romania+wages.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5207938965984406994" /></a><br /><br /><br />Private debt in May increased an annual 61.3 percent, driven by increased competition among banks and rising net wages, which rose 25 percent on the year in April. <br /><br />According to data from the Romanian central bank, household borrowing in euros continued to rise in March.<br /><br /><br />Total credit (including the coporate sector) was up by 66.3% year on year. Household borrowing in RON was up by 43% while household forex borrowing (mainly euros) was up a massive 140.3%. This latter number, large as it seems, was actually down slighly y-o-y from the 142.3 % registered in February and the peak 143.4% in January. The monthly rate of increase - 3.4% - was the lowest in at least a year, and again is well down from the 14.2% m-o-m peak hit in August 2007.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvOlJyp0Sk8MArNOFb_k8uYmwNJpNU1Gtve6FdlK28nlpjAmoWFnQ0laF_gQrtd_EhjZwQCXGdneoSpzBfqha1VxRTp9EkkRTvGc88Pbcek6XdqUb8qImhCJbN8MUUmbekqWjwUrFclMj9/s1600-h/romania+two.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvOlJyp0Sk8MArNOFb_k8uYmwNJpNU1Gtve6FdlK28nlpjAmoWFnQ0laF_gQrtd_EhjZwQCXGdneoSpzBfqha1VxRTp9EkkRTvGc88Pbcek6XdqUb8qImhCJbN8MUUmbekqWjwUrFclMj9/s320/romania+two.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5197573833055299394" /></a><br /><br /><br /><br /><br />Government spending was up 39 percent in the first five months from a year earlier. <br /><br />A weaker currency, which has declined more than 13 percent against the euro in the past year, has also made imports more expensive, along with gas, rent, telephone bills along with a number of other items traditionally indexed in euros in Romania and paid in lei.Unknownnoreply@blogger.com0