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Viewing cable 08BUCHAREST562, ROMANIA: CENTRAL BANK ON CREDIT MARKETS, INFLATION AND

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Reference ID Created Released Classification Origin
08BUCHAREST562 2008-07-14 05:43 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Bucharest
VZCZCXRO5978
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0562/01 1960543
ZNR UUUUU ZZH
P 140543Z JUL 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8484
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
UNCLAS SECTION 01 OF 02 BUCHAREST 000562 
 
STATE FOR EUR/NCE, EB/IFD 
TREASURY FOR LKOHLER 
COMMERCE FOR ITA BURGESS/KIMBALL/NAJDI 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EIND RO
SUBJECT: ROMANIA: CENTRAL BANK ON CREDIT MARKETS, INFLATION AND 
EXTERNAL DEFICIT WORRIES 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
1.  (SBU) Summary. At a June 27 roundtable to discuss the Romanian 
central bank's (BNR) stance on credit growth and its impact on other 
economic fundamentals, BNR Governor Mugur Isarescu stressed that 
BNR's recent tighter monetary policy does not aim to stop 
non-government credit growth, but instead to encourage a normal 
weight of such credit as a percentage of GDP. In Romania 
non-government credit outstanding is nearing 40% of GDP, still far 
below the EU-15 average of nearly 100%, which still allows 
significant room to grow.  However, the BNR Governor remains worried 
that the present non-government credit growth rate is too high, 
posing risks for financial stability in light of Romania's 
above-target inflation rate and large external deficit.   End 
summary. 
 
2.  (SBU) BNR Governor Mugur Isarescu hosted a roundtable on June 27 
to discuss BNR's views on non-government credit growth in relation 
to the current account deficit, inflation, and economic growth. 
Participants included BNR officials, commercial bankers, and 
managers from top auditing firms and the stock exchange.  In his 
keynote presentation, Isarescu stressed that from a macro-economic 
perspective, BNR is interested in both price stability and the 
financial stability of commercial banks and non-banking financial 
institutions.  With regard to price stability, the BNR is trying to 
bring inflation back under control with (he insisted) the support of 
the Government of Romania (GOR) from a budgetary standpoint. 
However, in his opinion, the recent surge in inflation has for the 
most part been caused by exogenous factors, including poor 
performance by Romania's agricultural sector in 2007 coupled with 
continued high demand for foodstuffs.  He explained the latest hike 
in interest rates by stating his hope that this will reduce demand 
for credit, while at the same time encouraging savings through 
higher commercial bank interest rates. (Note: the BNR recently 
raised short term rates by 2.5 basis points to 10 percent.) 
 
3.  (SBU) With regard to financial stability, commercial banks are 
generally in good shape, but anecdotal evidence indicates that 
credit may be growing faster than the capacity of banks to manage 
the risk of nonperforming loans.  According to Isarescu, one early 
warning signal is that some commercial banks have purportedly been 
granting loans simply for households to cover regular utility bills. 
 Not only is this an inappropriate use of credit, it is also a sign 
that rising prices are straining household budgets.  Isarescu warned 
that this behavior will increase the level of uncollectible debt on 
the books of commercial banks in the event of an economic slowdown. 
Additional concerns include greater risk to banks from increasingly 
sophisticated counterfeiting of personal identity documents in order 
to prove income on loan applications; this counterfeiting has become 
a closet industry in some Romanian counties.  In addition, the risk 
of default is concentrated in the relatively small number of 
households, primarily in major cities, able to access commercial 
credit.  Many households, especially in rural areas, still remain 
underserved.  According to Isarescu, expanding banking services into 
rural areas would decrease risk, both by reaching new businesses and 
households and by offering credit securitized against real property 
assets. 
 
4.  (SBU) Beyond its inflation worries, the BNR believes Romania 
faces economic challenges connected to the level of the external 
deficit and risks from a fluctuating foreign exchange rate.  Of 
these, Isarescu considers the external deficit to be the bigger 
problem.  While it is possible that the size of the deficit relative 
to GDP is exaggerated due to underreporting of GDP, at almost 14% of 
GDP it still is too large.  According to the central bank, a current 
account deficit of this size is unsustainable in the medium to long 
term.  The goal is to bring it down gradually to a more sustainable 
7-10% of the GDP, at which level foreign direct investment inflows 
can be expected largely to cover the deficit. 
 
5.  (SBU) While international financial markets as a whole are 
experiencing a shortage of liquidity, Isarescu believes there are no 
serious short-term liquidity concerns for Romania.  He reiterated 
his opinion that the Leu was overvalued for most of 2007, a verbal 
cue that BNR is cautious about increasing the Leu benchmark interest 
rate any further out of fear that a higher spread between Leu and 
Euro rates will fuel speculative capital inflows.  However, this 
reluctance to hike interest rates beyond the current level could 
begin to impact negatively the BNR's ability to influence 
inflationary expectations, if inflation does not begin to moderate 
soon. 
 
6.  (SBU) Comment.  One of the reasons why Romania's financial 
markets and non-government credit growth have been little affected 
by international market turmoil is that, unlike some other EU member 
 
BUCHAREST 00000562  002 OF 002 
 
 
countries experiencing high current account deficits, Romania has a 
competitive banking sector which is not captive to a handful of 
foreign banks.  Another factor that has assisted the local market in 
avoiding the sub-prime mortgage problems seen in the U.S. and some 
parts of Europe is that in Romania, only 20% of total non-government 
credit is in mortgages, whereas housing loans average 70% of 
non-government loans in the rest of the EU.  The BNR Governor used 
the opportunity of this workshop to publicly advocate for tighter 
lending and a more balanced external deficit as ways to mitigate 
possible economic over-heating and inflation.  At the same time, 
commercial bankers are still hungry for market share, making 
restrictions a harder sell.  While the rate of increase in inflation 
may slow down this year, the BNR is unlikely to achieve its "price 
stability" goal of keeping inflation within the target ceiling.  End 
comment. 
 
TAPLIN