Romania to receive €20bn of IMF-led aid

Romania became the latest eastern European country to seek external financial support on Wednesday, with the announcement of a €20bn ($27.1bn, £18.5bn) International Monetary Fund-led financing package to help steer the country through the economic crisis.

In return for the funds the country must bring its budget deficit below 3 per cent of gross domestic product by 2011.

The IMF will lend the country €12.95bn with further support coming in the form of €5bn from the European Union, €1bn from the World bank, and up to €1bn from multilateral institutions including the European Bank for Reconstruction and Development.

Jeffrey Franks, the IMF's mission chief for Romania, said Romania would be expected to carry out reforms to government spending, its financial sector and monetary policy in return for the loan.

"There will be specific reforms in the fiscal area to make sure the deficit stays low over time – restructuring wage policies, recalibrating the pension system to make it sustainable, improving the control and monitoring of public enterprises, and [the government] will introduce a fiscal responsibility law that will improve the budget process, by limiting the number of budget revisions in one year, for example," he told the Financial Times.

He said the loan might allow the Romanian central bank to ease monetary policy by cutting the 40 per cent reserve requirement for banks lending in foreign currencies, thereby improving companies' access to credit. But this need not lead foreign mother banks to seize the opportunity to withdraw capital from Romania.

"We don't want to put our money into the country to facilitate capital flight by others," Mr Franks said, "so we'll do everything possible [...] to create conditions so people want to keep their money in the country."

Ruling out any counter-cyclical spending, he added: "It is not possible for Romania to avoid the affects of the downturn. The objective is to minimise the effects."

Though similar in size to Hungary's IMF-led rescue package last autumn, Romania's loan will have a duration of two years, compared with Hungary's 15-month loan.

"Since the Hungary deal was implemented, it has become clear that the crisis period is going to be longer," Mr Franks said.

The extent of the slowdown has taken Romania by surprise. Even in January, Traian Basescu, the president, was insisting that EU support would be sufficient even in the worst case. However, collapsing exports and investor nervousness, reflected in credit default swap spreads that have widened from around 200 basis points in September to a peak of 780bp in late February, have forced a rethink.

The IMF forecasts Romania's economy will contract by 4 per cent this year and show no growth in 2010, while the rescue package targets a budget deficit of 4.6 per cent of GDP for this year. Without the intervention, the IMF believes the budget deficit would reach 9 per cent.

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