June 8 (Bloomberg) -- Greeks need to accept steps to avoid exiting the euro as the prospect that voters will reject austerity measures may push the Balkan region into a prolonged recession, Romania’s two top government leaders said.
Greek efforts to form a Cabinet in May 6 elections failed after voters rejected pro-bailout parties, prompting a new vote on June 17. The reluctance to accept more spending cuts led policy makers in Europe to speak openly about the possibility of Greece leaving the euro area. Romanian Finance Minister Florin Georgescu said voters would be “wise” to keep the euro because it’s “less costly and less painful.”
Southeast European nations, including Romania, are struggling to keep their economies afloat as Greek’s debt troubles threaten to destabilize the Balkan region’s banking industry and may prompt governments to step in, risking even deeper fiscal instability.
“I hope Greece is going to remain in the euro zone,” Prime Minister Victor Ponta said in Bucharest on June 6. “Romania and all the countries in the region have already been affected. I hope they won’t be affected even worse in the future.”
Greece’s economy will shrink 4.7 percent this year after contracting 6.9 percent in 2011, the European Commission said last month. Its debt load will reach 160.6 percent of gross domestic product, versus a euro-region average of 91.8 percent, the commission said. Romania’s debt load stood at 34.6 percent at the end of March.
Fallout from the Greek crisis helped push the Romanian leu to a record-low 4.4946 per euro on May 28. The currency has lost about 3 percent since the start of the year, while the Polish zloty and the Hungarian forint gained 5 percent and 6.4 percent.
Subdued demand because of Europe’s debt crisis is damping export growth across the Balkans, which rely on their richer western European peers to take in the goods they produce. Romania’s economy shrank 0.1 percent in the first quarter from the previous three months, entering its second recession in four years, while Bulgaria’s stagnated in the same period and Slovenia’s expanded 0.2 percent. GDP contracted 1.3 percent from a year ago in Serbia and Croatia.
Leaving the region even more vulnerable is the position of Greek banks in eastern Europe, which control more than 10 percent of the banking industry.
“I’m sure the Greek society as a whole and the politicians will be wise enough to realize that adjustment inside the euro zone is less costly and less painful in the long term than adjusting outside it and navigating alone in a globalized world,” Georgescu said in a Bucharest interview on June 5.
The cost of insuring against a default by Romania increased to 450 basis points yesterday, after declining to as low as 297 basis points on March 14, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps for Hungary increased to 595 basis points, while for Poland they reached 253 basis points.
Some European leaders, including Italian Prime Minister Mario Monti and French President Francois Hollande, have challenged German Chancellor Angela Merkel to get a euro-area debt-sharing system in place and increase the role of the European Central Bank in protecting the financial system.
Ponta said he supports French President Francois Hollande’s economic growth-oriented plans, including joint Eurobonds, as austerity alone is “unsustainable.”
Ponta’s Cabinet raised state wages by 8 percent beginning this month and plans to grant another 7.4 percent increase next year to compensate for a 25 percent cut in 2010, one of the deepest in Europe.
The Romanian premier inherited from the previous administration a target date of 2015 for adopting the euro. Though he doesn’t plan to immediately change it, he acknowledged it’s probably too ambitious.
“We just hope the crisis in the euro zone will be history in 2015 and then if Romania is prepared, we will think again about joining it,” Ponta said. “Realistically speaking, we should take this date just as a wish and nothing more.”
Romania secured a 5 billion-euro ($6.3 billion) precautionary loan from the International Monetary Fund and the European Union last year to shield it from market turmoil. Ponta plans to meet commitments to the lenders and keep the budget deficit below 3 percent of GDP ahead of elections this year.
‘Clean Bill of Health’
The government may continue to seek the IMF and EU’s guidance even after the current accord expires in March 2013 without borrowing more money and depending on the outcome of the vote, according to Ponta.
“I think it doesn’t hurt at all to continue to have some sort of a precautionary arrangement with the international financial institutions,” Ponta said. “We would use it as a clean bill of health which we would present to markets to get funding.”
Romania’s economy will receive a boost from private consumption, which will probably grow 1.8 percent following the wage increase and the payback of some social contribution to pensioners, Georgescu said.
Next year’s budget will be based on a deficit target of about 2.2 percent of GDP, under European accounting standards, Georgescu said, adding that the government’s parallel objective is to keep public debt below 34 percent of GDP between 2013 and 2015.
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