Electronic copy available at: http://ssrn.com/abstract=1549547 1
Senior lecturer Ph. D. Vechiu Camelia Senior lecturer Ph. D. Enache Elena Senior lecturer Ph. D. Morozan Cristian Lecturer Assistant Candidate Marin Carmen
In 2008, the global financial crisis has generated a feeling of distrust from investors and significantly increased their risk aversion. The size of current account deficit, the relatively high external financing needs and the dependence of the banks on it, the high ratio between loans in foreign currency and deposits in foreign currency made of the Romanian economy, a risky destination for investors.
In these conditions, since the end of 2008 and throughout 2009, the government's economic program was focused on reducing the external deficit in both public and private sector, on minimizing the effects of recession, on avoiding a crisis of the exchange rate and on cooling the inflationary pressures. Those requirements are found for 2010 and more so as our country has achieved significant loans in severe conditions.
Supported by the global financial crisis, the evolution of the national currency raised major problems. As in the period 2005 * 2007, inflows of foreign currency overrated the national currency (leu) more above the level indicated by fundamental factors of exchange rate, the reduction of the external financing and the uncertainty caused later an undue depreciation of the national currency (leu). Despite large foreign currency purchases made in the previous period, the National Bank of Romania (NBR) was able only to alleviate unsustainable appreciation of the leu, although the challenges in the banking system were strong. The sustained dynamics of loans in foreign currency in 2004 * 2008, would create adverse effects on the banking system in terms of rapid and excessive depreciation of the leu (Chart 1).
Chart 1
Source: ational Bank of Romania
Deposits and loans in foreign currencies
population husbandry non – financing organizations
billion lei billion lei
deposits in foreign currency loans in foreign currency net position
2
In this context, central bank policy about intervention on the foreign exchange market has been targeted by the idea that a high exchange rate volatility is harmful both for the inflation target and the strength of the real sector and the financial one. The more so as the Romanian economy considered a small one and with a high degree of openness is constantly exposed to the danger of adverse capital movements in the financial markets, particularly the currency one.
Interventions of the National Bank of Romania on the foreign exchange market followed to avoid the excessive currency depreciation and the impairment was linked to the progress in the current account adjustment.
Moreover, these foreign exchange interventions were also designed based on the foreign currency reserves. Foreign exchange reserves resulting from intervention of overappreciation period (2004 * 2008), to which were added the amounts received from grant agreement agreed with the International Monetary Fund, European Union and other international financial institutions, have enabled the central bank to support national currency (leu). National Bank of Romania considers not only the absolute value of foreign reserves, but also the derivative indicators, meaning the foreign exchange reserve expressed in months of goods and services imports and the ratio between foreign reserves and short*term external debt (Chart 2).
Chart 2
Source: ational Bank of Romania, ational Institute of Statistics
The NBR strategy to reduce the effects of the crisis also followed the size and the moment of foreign exchange interventions which were linked with the control of the liquidity on money market, provided that the budget deficit financing was made in an important measure also using amounts received from the International Monetary Fund and the European Union. In
Foreign exchange reserves at BR: derivative indicatives
month
Official foreign exchange – month of goods and services import
Official foreign exchange / external debt TS (the scale on the right)
3
2009, the NBR has provided liquidity to the banks, after the period 2004 to 2008 amid liquidity excess generated by large capital inflows in the Romanian economy, it was in the net debtor position towards the banking system. The intervention on the currency generated by the Central Bank also aimed at trying to avoid reversing its position of creditor to the banking system, which would be likely to cause problems in the transmission mechanism of the monetary policy (Chart 3).
Chart 3
Source: ational Bank of Romania
In this context, we can say that foreign currency interventions were necessary not only to maintain the exchange rate, but also for successful management of the liquidity in the money market (Chart 4).
Chart 4
Source: BCE, BRI
Liquidity provision operations
billion lei, daily medium stock
liquidity provision operations (repo and swap)
loan facility
ROMA IA
nominal exchange rate to Euro effective exchange rate (+) appreciation ()) depreciation RO /EURO index, dec. 2005=100
daily rate
Decrease of the depreciation rate of the national currency, and hence of inflationary pressures arising from the exchange rate channel, while with the efforts at fiscal consolidation have allowed the Central Bank to move to prudent easing monetary policy since the beginning of 2010 through the following measures: The interest rate policy was reduced to 7.5% per year, maintaining current levels of minimum reserve ratios binding applicable to liabilities in lei and, respectively, in foreign currency of the credit institutions (15% and 25%), strong management of the liquidity in the banking system to strengthen the monetary policy transmission signals.
Monetary policy interest is a directed interest, giving the market tone, but each Central Bank has its own specific set of interests and other instruments that transmit monetary policy, and this set of tools depends on every market specific conditions (repo rate, interest paid on deposits and reserves, interest on short*term interbank market).
For Romania, NBR adopted a lower monetary policy interest in order to alleviate the dispute between it and the commercial banks for crediting the real economy.
According to the commercial banks, they seek to limit risks through more rigorous selection of clients, although statistics are not very encouraging in this respect. Share of nonperforming loans (graded in Loss category, for which the chances of recovery are minimal) in the loan portfolio of banks has significantly increased, to over 9% in late 2009 versus 3.5% in 2008. Loans placed in Loss and Doubtful categories represented 12.3% of loans granted by banks, comparatively to 5% in 2008 and total loans of Substandard, Doubtful and Loss categories reached 20.8% versus 10.5%.
Thus, in these conditions of timid and slow exit from the crisis, the agreements with the European Commission and the International Monetary Fund provided two essential elements for the Romanian economy: external financing gap and credibility.
Now, Romania can not get from foreign banks abroad a lower interest rate than that required by the International Monetary Fund, which is 3.5% or that of the European Commission, of 3.14% per year. The most recent Romanian state loan from the local banks, more than two billion lei, was taken with an interest rate of 8.86%, while for the loan of 1.42 billion euros in November 2009 the State agreed to pay an interest rate of 4.25% per year.
5
Imports of credibility of the European Commission and the International Monetary Fund has provided the funding of Romanian economy, a funding positively reflected into several directions: investment relatively higher compared to the situation where there would not have been concluded agreements; mitigate exchange rate depreciation of the leu according to euro and other currencies, signed the agreement in Vienna, where banks have pledged to renew financing lines and maintain capital adequacy rates at insurers levels.
Amid all of this external funding, adopting some political decisions harmonized with European measures of economic recovery, represents, according to specialists, a positive signal beginning with the third quarter of 2010.
We can not conclude without specifying that the option of the NBR to intervene in the currency market was not unique in Central and Eastern Europe, the regime of controlled floating of the national currency being also charged by the other Central Banks, currency interventions of which are amplified after onset of the global financial crisis. In these circumstances, Central Banks in countries like Czech Republic, Poland, Hungary, which have flexible currency rate decided against accepting an excessive depreciation of local currencies which could create destabilizing movements, committing themselves to intervene to combat this phenomenon.
Bibliography:
1. Isărescu, Mugur, Reflecţii economice, Romanian Academy, Romanian Centre for Compared and Consensual Economy, Bucharest, 2001
2. Pocan, Ioana*Mihaela, Monetary policies and the Romania’s capital
market, Economică Publishing House, Bucharest, 2008
3. *** Business Magazine nr. 262, 263/2010; 4. *** Financial Market nr. 10, 11/2009; 5. *** National Institute of Statistics;
