Isarescu: Main risk – political decisions causing sudden movements of capital

Crediting gradually recovers and the move to the euro currency, with the exception of small countries, is made, paradoxically, by strengthening the role of the national currency, the governor of the Central Bank believes.

Internal political decisions that are misunderstood abroad and determine sudden and massive movements of capital represent the main peril for the economy in this electoral year, the governor of the Central Bank, Mugur Isarescu said in an interview with Mediafax, adding that he expects the crediting to pick up and sees real estate investments as opportune.
The governor also explained that the conditions of the stronger monetary relaxation conducted last week could not have started when inflation was high and much different from the values it reached in Europe.
“Figures clearly show that today we speak of a much lower inflation, at the lower limit of this interval. Second, the situation is different also because loans in foreign currency are decreasing now, compared to 2006–2008, when crediting in foreign currency was increasing at very high paces. Now, foreign currency loans not only stopped growing at high paces, it even diminishes. Is it not normal for us to reduce the cash reserves?” the governor added. Isarescu also mentioned that it is useless to insist on the link between reducing the cash reserves and the movement of the exchange rate. “Because the respective measure comes into effect only on 24 January and does not have a direct impact. Of course, there can also be indirect links, regarding punctual matters.”
Mugur Isarescu believes that the move toward adopting the euro, with the exception of small countries that have a monetary council, is made, paradoxically, by strengthening the role of the national currency, instead of weakening it.
Isarescu also referred to loans in foreign currency, as BNR took a series of general measures aimed at discouraging the crediting in foreign currency, thus enforcing in Romania the crediting norms that were subsequently promoted by the European Central Bank. “When the situation changed, the measures of BNR were in accordance with the new realities.” Although the decisions are based on what happens in Romania, the governor proposes to consider the level of interests in neighbouring countries, otherwise there is the danger that massive cash inflows-outflows, and especially short-term speculative capitals destabilise the situation.
Referring to bad loans, Mugur Isarescu said that commercial banks must realise that performance and profitability depend on the quality of clients, the way they are able to collaborate with their customers. “There is a boulder of opinions about banks, said to be full of dirt that must be cleaned. This is not true. Banks put their things in order – on one hand they have bad loans, on the other they formed provisions, which means good money that will serve to cover possible losses. Why they do not get rid of them, this can be a different question… If they “netted” them (deducting these provisions from the volume of bad loans) the bad loan ratio would fall well under 20 pc, even under 10 pc.” But there also are legal, contractual, bilateral matters from one customer to another, things that pertain to the international accounting rules, and eventually situations that are particular to each bank, which delay this “netting.”
As for the return of crediting, the governor believes that it recovers slowly, as RON-denominated loans increase. “Crediting in RON will pick up and will compensate the decline of loans in foreign currency, so we will have an increase of the volume of loans, in total. This is happening anyway, the process has already started.”
Asked about the measure in which crediting will contribute to economic growth this year and what growth of the GDP the Central Bank estimates for 2014, Isarescu commented the fact that they do not currently have a different estimation than that of the report made in November 2013, around 2.4 pc for 2014, adding that supplementary incentives are needed in order to obtain a stronger increase of crediting.
At the same time, the head of the Central Bank sees a change in the architecture of the European banking system, where liquidity will be secured by the customers with deposits within the guaranteed level of EUR 100,000, while those who have bigger deposits will diversify their investments and take responsibilities, thus determining the increase of the capital market. “This is how liquidity proper will be formed. At the same time, we will witness the development of the capital market, where the investor takes the risk. Because of this, we can say that, unlike the USA, the capital market of Europe is undersized, so this situation will ultimately result in the development of the capital market. In brief, this is about managing the risks, which implies responsibility and diversification,” the governor mentioned.
Isarescu also explained why he will not run for president of Romania, bringing the argument that a political career cannot begin after a certain age.
Toward the end of the interview, he said that in 2014 he could invest possible financial resources in agriculture and other productive sectors, same as he did until now.

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