According to Joseph Stiglitz, the former Senior Vice President of WB and Nobel Prize laureate for Economy, the advantages against crisis are that the country is small and is a member of the EU family.
Romania has advantages when faced with financial market turbulences, because it is less dependent from foreign banks, while some countries have no local banks, Joseph Stiglitz, the former Senior Vice President and chief-economist of World Bank (WB) and Nobel Prize laureate for Economy said yesterday.
Attending the third day of the Central and South-East European Financial Forum, Stiglitz explained Romania’s main advantage is being a small country and belonging to the large European Union (EU) family. To this adds a good and flexible exchange rate, but whose efficiency is affected by the large share held by credits in foreign exchange.
“Rate devaluation would lead to an increase in the debts of those who undertook credits in foreign currency. The larger the foreign exchange loan you have, the least you can benefit from the rate flexibility. Problems are not so severe here. The measures and regulations taken in the bank system were good,” the former WB chief-economist explained.
Another important advantage for Romania against the crisis is BNR decision to cut the Minimum Reserve Ratio (RMO). “Brazil has the possibility to lower its reserve ratio conditions as answer to the crisis. Romania has the same possibility,” Stiglitz pointed out. On the other hand, he mentioned that recession in America – the country where the crisis started – won’t end before 2011. At the same time, he considers “a myth” the idea that Europe is immune to crisis.
Stiglitz’ ideas were supported by central bank Governor Mugur Isarescu, who said the Romanian economy is too small to pose a threat to financial stability region wide. “We are a small economy, but not small enough to be spared by international crisis,” said the Central Bank official. He rejected a number of comments by foreign analysts who consider Romania cannot avoid a financial crisis, against the background of problems in the banking system, thus damaging the stability of the region.
“The EU member countries are in the club. Romania, Czech Republic, Poland, Hungary are not members of the euro zone. Until the moment convergence is complete and we adopt the EUR, again, this vision that we should be treated specifically will maintain. And you know there are different timetables for adopting the euro. We are keeping our ERM targets in 2012, and we knock on the door in 2014,” the BNR governor explained.
Use of imf funds is adequate
The way Romania is using the funds from the International Monetary Fund (IMF) to compensate a temporary reduction in foreign direct investment (FDI) is most adequate, Joseph Stiglitz said.
“FDI are very cyclic. They come in good years and, even if they don’t go, like short-term capitals are doing, they decline during bad years,” said Stiglitz, who is now an adviser of US President Barack Obama. The IMF imposed Romania no other conditions than the ones authorities wished to meet anyway, he said. Romanian authorities should diminish the effects of crisis by using the available money to set up new financial institutions with Romanian capital, which would borrow money mainly to SMEs, as generators of jobs and economic dynamism.
“Use your funds to create new crediting capacities, to provide partial guarantees on new credits. Lower the risks by providing risk-management support,” Joseph Stiglitz urged.
In his turn, the BNR governor said ‘foreign’ banks in Romania actually are Romanian banks with foreign capital, because they are regulated and supervised by the BNR. In his opinion, if a mother-bank has problems, ‘contagion’ in Romania shouldn’t be of financial nature, as it would rather create panic and damage the reputation of the mother-bank. Isarescu added that, although the stability of prices is a priority for BNR, financial stability was not set aside, because it is a condition for the long-term stability of prices. The additional capital that banks should bring in order to reach a 10 pc solvency rate under stress test scenarios does not exceed a cumulated figure of EUR 1 bln, Mugur Isarescu added.
On the other hand, former Finance Minister Varujan Vosganian, also attending the event, insisted to make clear that the provisions in Romania’s agreement with the IMF should be enforced cautiously, because otherwise they would compromise the chances of development for the Romanian economy. The Senator added that Romania will go through changes caused by the financial crisis, in terms of both economic and social life.
Recession in “V” vs. recession in “L”
The recession generated by the global crisis will be the most serious of the three types known by the specialists in economy, namely the recession in “L,” Joseph Stiglitz added on Thursday. This supposes that after the lowest level was reached, the economies will remain there several years. The other two forms known by the specialists in economy are the U and V shaped ones, which suppose that when the economic fall has reached the maximum point, a relatively quick revival will follow. Stiglitz argues his point of view mentioned that the economic recession had a major social impact which conducted to the alarming growth of unemployment, effect that will propagate for many years from now on.
Not as pessimistic is BNR Governor who continues to see the realistic aspect of the situation stressing the idea that the Romanian economy will experience a recession in “V,” with a fall, followed by a gradual revival, the minimum point of this fall being reached in Q1 of this year. “We are not so dependent on exports and there is room for improvement and growth in the domain of agriculture,” Isarescu stressed.
The worst has passed
He also stated that in the second quarter the economic growth could be resumed and that he maintains his hope that the economy will register a positive advance until the end of the year. Governor Isarescu says the economy is not in technical recession, term that he defines as a decline of GDP in two consecutive quarters, compared to the same period of the previous year. The official of the central bank estimated that four of the five components of the crisis – exchange rate, payment balance, inflation, capital availability – have already been exceeded. “What remains is the economic crisis,” Isarescu said, stressing that “The worst has passed!” He mentioned that if the overcoming of the crisis will be measured through the rise of the living standard, this will happen in one and a half years.
“I have never said and I don’t say that the economy works well. I said that compared to my expectations the economy answered very well to the adjustment which was absolutely necessary, because the adjustment can mean even amputation. As long as the economy needs adjustment, jobs appear,” Isarescu added. He also states that certain normality will appear in the market both at the level of credits, and of the economy, but we shall not return any longer to growths of over 60 per cent (in the case of credits).
In his turn, the former Finance Minister, Varujan Vosganian, stressed that Romania needs two-three years to overcome the financial crisis.
Isarescu: a correction of 8-9 pc of the current account deficit is enough
A correction of the current account deficit of up to 8-9 per cent this year would be enough not to affect very much the economy. Another variant would be to cover the current account deficit with FDI, plus a range of long term credits, BNR governor declared. “It is better to focus on the gradual correction of the current account deficit. A variant for a sustainable level of the current account deficit would be its entire coverage by foreign direct investments, but this may be too much to request,” Isarescu added. The Governor recalled that the current account deficit of 14 per cent of GDP in 2007 and of over 12 per cent in 2008 was too high.
Oprescu: the fall of dwelling prices, the opportunity of the crisis
The financial crisis could be beneficial for the City Hall, because the price of a turnkey flat has dropped from EUR 1,200-1,300 per sq m, to EUR 380-480 per sq m, and around 11,000 people have submitted applications for new dwellings, Sorin Oprescu, mayor general of Bucharest, declared yesterday at the financial forum. According to him, the financial crisis has not spared the City Hall, whose budget was reduced in 2009. He also stressed that the rating of the City Hall has been lowered but he will launch very soon public-private partnerships for certain programmes. Bucharest mayor appealed to the bankers to sustain the projects of Bucharest City Hall whenever they have the opportunity, stressing that he will not renounce the suspended expressway project.