I know I said this before but it seems that Romanian economy is the best isolated and insulated economy in the world. Every time there some turmoil at the global level we are told that in no way Romania could be affected as we did our “homework”.
Yesterday, as expected journalists in Romania asked the banking sector regulator, NBR, about the possible effects of any troubles with banks in France. As it was the case with the Greek owned banks in Romania the answer has the role to calm down the people. But in yesterday’s response by Mr. Vasilescu, in Romanian here, said something that just does not sit well with me. I’ll get there pronto.
But first let me tell you the main point of the message, for our non-Romanian readers. In short, things are not as bad as they seem, banks in Romania are well supervised and monitored by NBR (I have a big question mark here at least about one bank), and then implied that banks in Romania are better than others (I guess at assessing risk and not make stupid investments). I will start a look at the banking sector shortly but you know my view that they are in a oligopolistic market.
However, the idea that caught my attention was that banks in Romania are Romanian banks with French, Greek, Austrian etc.. capital. This is an odd way of looking at property and ownership. For example, shareholders of SocGen do not take into account profit or loss of the Romanian subsidiary? Or if capital is scarce in France and very expansive that cost will not transfer to the Romanian subsidiary? Or if other banks are afraid to do business with SocGen based on numerous reasons will they do business with the Romanian subsidiary? Do not bother to answer those are all rhetorical questions.
An interpretation like this about ownership and responsibility by the local regulator worries me. It implies, at least to me, that in case of default those banks would be saved by the Romanian state. It also implies that their foreign debt is implicitly the guaranteed by the Romanian state. Much like what happened in Ireland and it does smell a lot like Ireland.
To clarify, banks in Romania cannot go on funding themselves under current conditions after either their OWNERS increased the cost of capital or just plain simple withdraw it and they need to be funded locally. As the local market is short, very short EURO (it does not have any), the solution is to take them under the fluffy and comfortable arm of the state. Simple, isn’t it?
So, if my interpretation holds water, then the Romanian foreign debt is much higher, so are the arrears which means so will be the deficit. This time I really hope I am wrong.