Feb. 7 (Bloomberg) -- Romania will sign a precautionary accord with the International Monetary Fund and the European Union worth 5 billion euros ($6.8 billion) to provide a safety net during Europe’s sovereign-debt crisis, President Traian Basescu said.
The Balkan nation doesn’t expect to draw money from the two-year agreement, which will reassure investors that disciplined fiscal policies will remain in place through a general election next year as the government narrows the budget deficit to below 3 percent of gross domestic product in 2012, Basescu said yesterday in a televised speech from Bucharest. The IMF will set aside 3.6 billion euros for Romania under the new deal, while the EU may provide 1.4 billion euros in case of an emergency, he said.
“The agreement is necessary because the risks in the region are still high,” Basescu said. “We are in a sovereign-debt crisis and we don’t know how the situation in other countries can evolve. There’s also a political risk in Romania if we consider the elections and that’s why I insisted that this agreement be for two years.”
Romania faces growing public opposition to its austerity program, which it launched to win a 20 billion-euro ($27 billion) bailout in 2009 from the IMF and the EU that it will conclude in May. The government pledged to narrow the gap to 4.4 percent of GDP this year after cutting public payrolls by 25 percent and raising a consumption tax by 5 percentage points to 24 percent. That is weighing on the economy and put Romania into the EU’s second-worst contraction after Greece in the third quarter.
Economic output probably shrank 2 percent in 2010 and will expand 1.5 percent in 2011, according to the Washington-based lender’s projections. An IMF mission is in Bucharest until Feb. 8 to discuss the country’s economic situation.
Romania will sign the precautionary loan in March to strengthen its credibility, upgrade its transportation and energy industries, streamline the fiscal system and help absorb EU funds worth as much as 32 billion euros available through 2013, Basescu said.
The country won’t draw the last tranche of about 1 billion euros from the current agreement scheduled to be released in March because the central bank has enough reserves, Basescu said. The government will draw the last part from the EU to finance the budget deficit, he said.
The government needs to cut its deficit beyond the targets outlined under its current loan accord before its debt is upgraded from junk status, Fitch Ratings and Standard & Poor’s said last month.
Fitch and S&P both rate Romania, the EU’s second-poorest after Bulgaria, with a BB+, the highest junk grade. An improvement to investment status, which depends on spending cuts and implementation of approved wage and pension laws, may not happen this year, analysts at the two rating companies said.
The budget deficit widened to 7.2 percent of GDP in 2009 before narrowing last year to 6.5 percent of GDP last year, Basescu said.
To contact the editor responsible for this story: James M. Gomez in Prague at email@example.com