RON gets unexpected chance to push the Romanian economy further? (updated)

A statement from the National Bank of Austria (OeNB) to Austrian banks operating in CEE has created panic. It has such an impact that the Romania president said this today:

“I think that the statement of the OeNb demanding  that financing of subsidiaries of Austrian banks located outside the euro zone is stoped, is either a mistake or a misunderstanding.”

“To come today and declare that you are not going to continue financing your activities in Romania it shows a total lack of understanding of the current situation. It is a lack of fair-play and I want to believe that countries joining EU at a later date will not have to pay for the banks’ greed”

“Austrian banks made huge profits from 2000 until 2009 and they cannot come today and stop the financing of the Romanian economy. They have to use the financing mechanism offered by EU in order to continue financing the Romanian state, local companies and households. “

Very strong and bitter words from our President. Unfortunately, they are missing the point and also the good side of all that is happening. I am not sure who is advising our President but they should have not allowed this message.

Before going further this is what OeNB advised its banks (my bold):

“To promote the subsidiaries’ refinancing structure, credit growth will in the future be conditional on the growth of sustainable local refinancing (comprising mainly local deposits, but also local issuance activity and supranational funding, e.g. by the EBRD or the EIB).In the future, subsidiaries that are particularly exposed must ensure that the ratio of new loans to local refinancing (i.e. the loan-to-deposit ratio including local refinancing) does not exceed 110%.”

What is happening? Believe it or not, this could turn out to be a good thing for Romania if our officials meant what they said when talking about lending in RON, higher economic growth, lower inflation and smaller budget deficit.

Here is my take on all this (I hope at time the strong sarcasm will not hit you too hard).

First, it is true that banking sector in Romania was profitable for few years. It is also true that they paid taxes for those years and thus Romanian state has nothing to say about the magnitude of those profits. In the same time it is also true that since 2009 those banks made quite big losses and are expecting more. In the end I am not sure how much of the profit made before the crisis will be left.

Second, the Vienna accord from Spring 2009 forced banks to keep their exposure at that time to Romania. Did it help the Romanian economy? No. The only result was that the Romanian government could run a big deficit and finance it without being pushed by the market to reform.

Third, Mr. Vasilescu from NBR when talking about the Greek banks in Romania said that they are Romanian banks with Greek owners and thus they should not suffer from capital withdrawal. The same principle should be used here.  We are looking at Romanian banks with Austrian owners and by analogy the lack of extra funding from their headquarters should not scare us. They will be funded locally.

Fourth, those are good banks, I am told. Should they need financing then nothing stops them from listing on the stock market or issue bonds. All they need is a rating. Then they will compete with other banks for EURO if they need to increase their lending portfolio. We talk about banks, people. More so, independent subsidiaries, managed by top notch professionals. Finding financing to expand their plans should not be a problem. They made huge profits here based on expertise not on monopoly pricing. They could do it again.

Fifth, and this is the best result in my view, the advice from the OeNB offers an unexpected lifeline to RON. Here is why. The financing from Austria was in euro. But as we all know, euro lending is not supported by either NBR or the local banks. So, less euro in the local market should drive the price of new loans in this currency higher. Current loans should still be priced out of EURIBOR and a fixed margin so they should not be affected.

This is the chance for RON. The supply of RON is the monopoly of the NBR and the best part is that it is infinite. With euro becoming scarce the door is open for RON to finance the Romanian economy.  I know that until now everyone was saying that RON was expensive. However, adequate liquidity management from the NBR the price of RON should be just right (isn’t it?). Furthermore, the good news keeps on coming, the inflation forecast for Romania shows an inflation path that will not pass the 3% mark again in the next two years. Thus, no reason for higher interest rates in RON.What better environment for RON lending?

Now I come back to our President. I simply do not understand the frustration. As I said, our prayers have been answered: euro is out RON is in. And even the risk of not being able to finance the deficit is eliminated as the budget deficit for 2012 is set at 1.9%. In the same time, we are told that the number of public employees will fall. Not to mention expectations of an economy growing at 2%.

In conclusion, why are we so worried.? The banks are not Austrian are Romanian. The lending recommended by our officials and super-bankers is in RON. NBR does a wonderful job managing liquidity and the inflation forecasts supports lower interest rates in RON. The budget deficit will be one of the lowest in decades so the government will need less money for financing and we will finance it in RON, our currency.

After all these rush of good news, I have to wonder:  Is it possible that all this anxiety comes from our policy makers not trusting their forecasts of : economic growth, inflation and budget deficit?


A friend has warn me that my post is too ironic and thus I might be taken seriously. I see from your comments that he was right.

Through this post I wanted to expose the hypocrisy present in our policy makers’ speech. That’s all. If there is big financing problem either in RON or in EUR then the president should know the people responsible for this situation. I am sure that neither myself nor the OeNB advised to borrow in EUR as a Romanian Government in the short term in RON. We might not like it but capital will always search for the best return considering the risk. Everything else is just politics.

Thus, take this post as it is, a call and a raise  on the governments’ bluff that all is good with Romania, our banking sector and our economic policies.

These are related posts:

Scenarios for the Romanian debt story

Are banks in Romania well capitalized or not?

Alternative view of falling inflation in Romania


25 thoughts on “RON gets unexpected chance to push the Romanian economy further? (updated)

  1. They don’t have enough balls to inject ron in the economy, This is their problem. They should just quit their job, because them being chicken heads, misses with a tie, got us here, and is keeping us where we are today. We need some men on the NBR. (Sorry, you already know I don’t believe in inflation targeting and the monetarist theory).

    1. @Lavinia
      “They don’t have enough balls to inject ron in the economy, This is their problem.”
      So nice of you caring about the minimum wage workers who run the printing press at NBR. 😀

      They shouldn’t wait for Isarescu. They should start the machines immediately! 😛

      “I don’t believe in inflation targeting and the monetarist theory”
      So, you don’t believe that more RON injected in the economy will lead over time to inflation, overall increase in prices?

      By inflation, I don’t mean the CPI, product basket, used by NBR. I mean the overall increase in prices for all product categories: food, cloths, buildings, credit etc.

      I’m actually curious. Can you prove to me(logical arguments) that more RON injected in the economy doesn’t lead to more inflation?

      I understand that more liquidity injected in the productive side of the economy can lead to good results, if and only if, companies create more value in the process; and after a while the liquidity introduced is retreated from the market.

      1. The question is the reverse. Can you prove to me that more money injection, buy crediting the companies, mostly, (the consumer credit doesn’t have like a huge potential in Romania, the next … 2-3 years, anyway), bring higher annual inflation rates?

        Because I can even show you central banks printing directly to finance some part of the state’s debt, which is actually the second ugliest form of money printing, after printing it to give it to the people as a present, and had lower inflation rates, overall, not higher.

        I can even show you a state which printed money and had an overall deflation, for 20 years, as a consequence.

        And, mostly, I can show to you that in all the countries the annual inflation rates tend to be lower, not higher, as more and more credit and printed money appears around in the economy.

        Now you should show me a completely sound central bank, who printed money not to give them as a present to the people, and ended up in having an inflation problem. And don;t tell me about Zimbabwe, Romania is not actually that low and that underdeveloped, from all points of view. And it was not printing itself what brought that country where it is.

        And, mostly, you should show me a country that facilitated access to money, printed money, for their companies, and ended in poverty, misery, and high inflation rates. Because I wasn’t proposing to print money to make it a present to you :). But to credit it to companies, to increase the production level in our country, using our own resources, and without the fear that: omg, the foreigners will not bring money anymore! A tragedy, we will stop paying money aboard one day! This is great, we have our own currency, and is a great moment to start using it. Finally.

        But I can bet that people believing this theories didn’t ever look on any statistics, mostly historical, for any country 🙂 It’s just what you read in a book. Including you.

        Inflation is mostly an economic phenomenon, and seam to depend much more on the offer side, than on the demand side. The monetarists got it wrong. This is one reason for what the developed countries tend to have lower annual inflation rates than the underdeveloped ones, even when printing directly to finance the state debt, and mostly because they have much more credit then the underdeveloped ones. And, you know, all this countries didn’t have new money from the neighbors, like Romania, but from their own printing press. This is how they developed their businesses.


        I don’t need to show you nothing, you need to learn to develop your own views with the data in front of your eyes, and trying to think about what you see, and not reading a book. 🙂

      2. “The question is the reverse. Can you prove to me that more money injection, buy crediting the companies, mostly, (the consumer credit doesn’t have like a huge potential in Romania, the next … 2-3 years, anyway), bring higher annual inflation rates?”
        I’m referring to the monetary mass. For example, banks also increase the monetary mass through the fractional banking system.

        “And, mostly, I can show to you that in all the countries the annual inflation rates tend to be lower, not higher, as more and more credit and printed money appears around in the economy.”
        I’m not taking about inflation as the NBR of FED measures it. I’m talking about the overall increase in prices for all products and services and that includes buying houses, food, cloths, energy etc.

        “I don’t need to show you nothing, you need to learn to develop your own views with the data in front of your eyes, and trying to think about what you see, and not reading a book. ”

        I was looking for a mathematical proof, not for an opinion. I asked to prove it to me.

        It’s not just from reading a book. It makes sense logically. Let’s say that there’s 1 billion RON liquidity on the market. And with the help of the fractional reserve banking, NBR lending to the banks, and capital inflows from outside .ro the RON liquidity goes ballistic to 10 billion. If people will have more money in the pocket, they will be more loose with their bills and purchases. And people who will sell stuff will increase their prices and increase their nominal revenues this is because they will soon find out that they can get more money for the same quantity of products sold. So, the overall prices will increase.

      3. I have trouble with the way inflation is calculated by NBR. They ignore some of the more important areas of the economy.

        Here’s an explanation of the relationship between the inflation and house prices:

        Here’s it shows how the home prices in Bucharest grew 6 fold from 2004 to 2008:

        It’s stupid to include the rent price in the CPI but exclude the house price. The rent price is mostly based on prosperity of the people. And the house price is mostly based on the availability of credit.

        And buying a house with credit for 25 years is not an investment. In 25 years, you will pay 2.5 houses instead of 1. And an investment should either grow in value or throw off cash flow. A house doesn’t do either.

  2. “The budget deficit will be one of the lowest in decades so the government will need less money for financing and we will finance it in RON, our currency.”
    Who told you this?

    in 2012 the debt to be paid is around 344M EUR (capital and interest). From where do you think this amount will pop up? And also, if EUR goes out, RON will go higher (ratio). Need more RON on the market?

    I don;t think so …

    And don’t forget that NBR officials missed the inflation forecast for the past, I don’t know, 6-7 years? So, don’t expect them to be correct.

    1. Obvisously you did not read my little statement on the sarcasm. 🙂 My point is that, Romanian policy makers cannot hide anyomore. They have to really reform this economy.

      Sent from my iPhone

  3. Question: What do you do if you are the Ministry of Finance, you have a large part of your debt denominated in EUR, and EUR financing becomes more expensive on your local market?
    And to make things more chilling, have you looked at the reimbursemenet calendar of Romania’s debt to the IMF?

    Maybe that’s why he’s so mad.

    1. Good questions. They should be addressed to those responsible for getting us in this mess. I am sure it is not me or the austrian banks. He should name names and kick some ass. 🙂

      Sent from my iPhone

  4. @Florin Citu
    “In conclusion, why are we so worried.?”
    Basescu believes that Romania has no capital, and Romania needs capital, and capitals comes from foreign banks.

    1. @Adrian T.
      I already made an update to the post make it clearer that it was a sarcastic post. But I hope he does not believe that capital comes from banks. Banks are only vehicles, capital comes from savers in Europe, who now are much poorer and need their money back.

      1. “I already made an update to the post make it clearer that it was a sarcastic post.”

        I got it. In the beginning, it was hard for me to separate your sarcasm from Basescu’s reality. I don’t believe his fantasies at all. 🙂

  5. Acum trebuie sa comentez in romana. Eu vad un real pericol pentru economie daca euro continua sa castige teren fata de ron. Cand pretul terenurilor va creste, euro va profita de terenul ieftin castigat acum si va pune si mai mare presiune pe leu. Prin urmare autoritatile au toate motivele sa fie ingrijorate, iar BNR sa intervina in piata. o_O 😀

  6. Florin, congrats for the interview at Europa FM… good to hear that open people manage to reach and to speak about economics at Europa FM Interviews. (Razvan, former colleague from Alba Iulia).
    PS: now that I found your blog, be sure I will continue to check your posts. :-))

  7. I very much enjoyed both the article and the irony (still thinking which one I enjoyed more). Yet, do allow me to wonder why you (still) bother spending time analyzing what the President says? This speech is just another sick play, with a Superhero daring the World for the sake of the super-lousy crowd. So that the crowd can continue sleeping good and hoping for the best. And if anything turns out not in line, the Superhero will explain us that it’s just a black swan.

    (Lots of people hear, only few understand)

    1. @Cris-mihai
      But it is more than that. Our president’s view are supported by the NBR and by the government. He might be the guy getting the ball rolling but the others are keeping it i motion. It is a great machinery of propaganda that is supposed to make us take our eye off the ball. It might seem harmless, but in fact there is an ulterior motive for all these messages. Here is my view. They first come out with a very optimistic scenario. They know is not going to work out but they need it for election purposes. In order to save face and come on top they need a scapegoat. The foreign banks have just offered the best villain. And when next year Romania will show negative growth and big deficit, it will not be because of bad economic policies. It will be because the banks have left Romania. Those greedy capitalists!!!

  8. True, true, true. But again, same old. The President and the Government have always been one and the same. As for the NBR…maybe they’re counting on the rational expectations theory? Hope for the best? (rhetorical, of course) yet, I’m not sure the “greedy capitalists” will be enough of a scapegoat. Because few understand. Moreover, one can’t really direct anger towards the “greedy capitalists” as it sounds a bit esoteric for the crowd. (and a bit strange the attack coming from a democratic liberal, I might add) So I believe that here it’s not really about scapegoats, but about Superheros.

    1. @Cris_miahi
      Scapegoats, superheroes, who cares? 🙂 It is not about the people , that is the problem. One thing that it is forgotten is that: governments should be afraid of their people and not people afraid of their governments.

  9. @Adrian, you miss the point.

    Show to me the relationship between the inflation rate and the interest rates. And then between the interest rated (including real) and the housing bubble.

    And, then, a question: what is the cause, and what is the effect between the 2 of them: the inflation rate, or the interest rate?

  10. And may be you could search also for other countries, as Romania doesn’t even have a monetary policy, actually. But you can also play a little with the romanian data. But this is another story.

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