IMF rescue package could sink leu to 5.00/euro

March 10, 2009 will remain a critical moment for the modern evolution of the local banking system, with the last minute news flurry now underway in Romania: press reports, releases and official communiqués informing that Romania is on the brink of concluding an agreement for a rescue package with European Union and International Monetary Fund.

Currency exchange rate: 5 lei/euro

[Update]:"It's likely to have a similar path as the forint"

The warnings from Romanian authorities over the past month mean that Bucharest’ call for help did not come as a surprise.

Although such an agreement would cap the euro’s rally versus leu on a short run, the situation in Hungary where the forint slumped 16.5% since it concluded the deal in mid October indicates that the local currency could drop even more against the single European currency.

"It's likely to have a similar path as the forint," said JP Morgan analyst Miroslav Plojhar. “It's likely that when the central bank is not defending a specific level, the leu should weaken", Plojhar added, Reuters informs.

Ivailo Vesselinov, EMEA economist at Dresdner Kleinwort said if market players deemed the amount of the agreement was too low, they could punish the leu and the prices of Credit Default Swaps (CDS – insurance against loan default).

The leu is overpriced and the rescue package would not improve the market condition, reads a report of UK-based research institute, Capital Economics, the first institution to say that Romania was likely to call for help from IMF.

“The national currency has surprisingly remained proof to the latest troubling events, suggesting that National Bank of Romania may have intervened to stabilize the fluctuations of the currency exchange rate”, said the analysts at Capital Economics.

However, all these interventions could be banned in case of a deal with IMF, a scenario wherein the leu would fall 15% and the currency exchange to jump to over 5lei/euro.

National currency ended yesterday’s trading on green, after a roughly constant downdraft, down to 4.2870 lei/euro, in tune with emerging currencies in the region.

A delegation from IMF will arrive later today in Bucharest to talk a possible IMF program in Romania , part of a ‘multilateral rescue package’, that would involve the contribution of European Union and World Bank. The delegation will be headed by Jeffrey Franks, and the regional office of IMF for Romania and Bulgaria will be led by Juan-Jose Fernandez Ansola.

IMF package won’t prevent recession in Romania

The rescue package from International Monetary Fund it will not prevent Romania from entering a deep recession this year.

Capital Economics’ experts see a contraction of Gross Domestic Product in Romania this year by 4% and by 1% in 2010 while the leu could ultimately fall by to 5.00/euro.

“Media reports suggest that Romania could be on the brink of agreeing a $25bn package of funding with the EU and IMF. While this should calm fears of an immediate meltdown and could lead to a near-term bounce in Romanian markets, it does not remove the need for a fundamental depreciation in the leu. Moreover, it will not prevent Romania from entering a deep recession this year”, Capital Economics analysts say.

Financial Times scenario: 20 bln euros

Yesterday morning, Financial Times newspaper reported, citing an official familiar with the issue, that Romania would be the recipient of 20-bln euro rescue package from IMF after the recent talks between the two parties due to be continued today.

Romania will thus, become the fourth east-European country to call for financial support at international institutions in the heat of economic downturn, after Hungary, Ukraine and Latvia.

The rescue package, similar to that agreed with Hungary both in terms of its absolute size and its value relative to GDP, would cover the short-term external debt due to mature next year, which should ease fears of a full financial collapse of Romania, analysts say.

This, in turn, may lead to a bounce in financial markets. CDS spreads, which have ballooned to record levels in recent weeks, should narrow. Nevertheless, the recent experience of Hungary demonstrates that, in the current environment, any market reaction could be short-lived, Capital Economics says.

Various scenarios for the rescue package

The rescue package that Romania deals with European Commission, IMF and with other international financial institutions comprises various scenarios, given the total amount that ranges between 9 and 20 bln euros, sources familiar to the issue told NewsIn.

“The worst case scenario implies a 20-bln euro rescue package for Romania, possible if the country is in maximum need of external finance. The best case scenario, however, sets forth a 9 bln euro loan”, said the cited sources, mentioning that the final points of the deal have not yet been hammered out.

Another official familiar with the situation said the amount reported by Financial Times newspaper, of 20 bln euros “was plausible”, without commenting any further.

“The size could in fact be similar to that agreed with Hungary, although the economic facts are completely different in the domestic climate”, source said.

Ministry of Finance and National Bank of Romania confirm loan talks

The Ministry of Finance have officially announced that Romanian authorities scrutinized the accession of medium-term financial assistance, decision communicated to European Commission.

“Ministry of Finance and National Bank of Romania (BNR) has started preliminary talks with officials from European Commission, International Monetary Fund and International Financial Institutions on the assessment of macroeconomic framework and necessary financing for Romania”, reads the press release remitted by MF.

The MF said the external financing together with the proactive responses of Romanian regulators consisted in a guarantee to consolidate the financial stability on a medium term, stimulating the business environment and regaining the confidence of investors in the country’s economic potential.

The International Monetary Fund has already agreed on a financial rescue package with two more countries in EU, Hungary and Latvia, imposing strict obligations especially on the contraction of budget deficit.

“Government will retain its decision to speed up the structural reforms for country modernization, to revive the competitive climate and to secure public finance sustainability”, the ministry of finance added.

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