Romania is third EU state to secure emergency loan from IMF

ROMANIA BECAME the third European Union member to secure an emergency loan from the International Monetary Fund (IMF) yesterday, clinching a €20 billion deal to bolster its strained finances.

Romania has struggled to fund large debt repayments and its budget deficit as its currency weakens and global credit dries up – problems compounded by dwindling investment in a formerly booming economy that may shrink by 4 per cent this year.

“In [the] current world economic environment . . . the financing gap has opened up,” said the head of the IMF mission to Romania, Jeffrey Franks. “With international support, the adjustment will be cushioned and we are hoping to avoid the worst and have a gradual adjustment over time.”

Economists blame unrestrained spending by the private sector and consumers, as well as loose fiscal and wage policies, for fanning an external imbalance that made Romania highly vulnerable.

“The Romanian government can no longer allow itself the luxury of a sizeable deficit,” Mr Franks said, adding that the country should slash its bloated public sector wage and pensions bills, which are putting enormous pressure on the budget. “The conditions agreed upon are ambitious but realistic,” Mr Franks added.

The terms of the loan, which includes cash from the EU, the World Bank and the European Bank for Reconstruction and Development, give the government room to fund social spending and stimulus packages, amid fears that drastic cuts to public services could spark social unrest.

After running a budget deficit of almost 5.3 per cent last year, the government is set to reduce that to 5.1 per cent this year and to below 3 per cent by 2011, measures that would position Romania to adopt the euro as planned in 2014.

The small reduction in this year’s deficit could also help prevent disputes in the ruling coalition, which includes liberals who favour deep cutbacks and left-wing members who threatened to veto the deal if it cut social protection for the poor and elderly.

Romania’s president Traian Basescu insisted that the loan – which follows similar IMF agreements with Latvia and Hungary – was a precautionary measure rather than “an appeal to be saved”.

“Romania has made a preventative accord. It would be hard to explain in the future if we didn’t buckle our seat belt through the accord,” he said.