Is Romania a subprime territory?

YES- is the straight answer if one looks at the parameters that define the Romanian financial landscape. The country has together with Bulgaria, the lowest per capita income in the EU and is also one the poorest members. Its population and companies are overburden with large loans denominated in Euro and Swiss Franc, secured with questionable property and other assets that in the last few months have dramatically decreased in value. One might add a property bubble that is still clinging on prices higher than in established western markets, which is at its first bursting stages, a fatally shrinking export market and a heavy dependence on imports, including basic foodstuff. That context prompted rating agencies such as Standard&Poor’s  to downgrade Romania to junk status in October 2008.

NO- according to Mugur Isarescu, Romania’s Central Bank governor. He even blames the press and the international rating agencies for stoking a “crisis mood” regarding the Romanian economy and hastening the heavy depreciation of the leu since December last year. Isarescu points out, that the banks functioning in Romania are well capitalised, with a high level of minimum capital requirement, able to offer credits and withstand payment demands. Also the country has the highest reference interest rate in Europe, making any speculative attack on its currency very expensive. However, Isarescu’s recent joint statement with other central bankers form Hungary, Czech Republic and Poland, on 24 February, indicates that things are not so rosy as previously stated and heavy clouds are gathering on the economies of Central and South East Europe. 

Where then the balance inclines? 

ROMANIA’s CURRENCY FALL: context and expectations

On January 19, Bloomberg reported that the Romanian currency, the leu, categorised as the “worst performing emerging-market currency,” may be devalued with as much as 9% this year. That is on a background of sharp economic downturn and, shall I add, contemplated from the crest of an unravelling huge property bubble where prices for real estate are even at this hour higher than in Western Europe, coupled with toxic corporate and individual Euro-borrowing. And to make things nuclear, add the rapid exit of the western investment funds and money, together with an ineffective government that governs in name and has not yet even seriously discussed the budget project for 2009. Within that context, the Romanian financial system and implicit economy are open to speculative attacks and may enter one of the most serious recession spirals within the EU.

Also, the prognosed budget deficit is worrisome:

Romania is likely to post a budget deficit of 7.5 percent of gross domestic product, the biggest among emerging-market economies in the region, the European Union said today. Industrial output plunged in November by the most in more than eight years, while the current-account deficit widened to 16 billion euros ($21 billion).

ROMANIA’s ECONOMY goes Latvian (or even Argentinian)

Paul Krugman, the US Nobel laureate economist, published the following post entitled Latvia is the new Argentina that also gives useful insights into the evolution of the new EU member economies, Romania among them. The current very steep, unprecedented, devaluation of the Romanian currency, the leu, and worrying current account deficit, not speaking of the massive Euro-indebtedness of the population and companies bring back home to roost all of Romania’s chickens:

I’ve been saying this for a couple of weeks, but Edward Hugh has the goods.

Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative – sharp wage cuts, and basically a major domestic deflation – will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.

One has only to imagine how the Romanian real estate bubble would fare in a quite possible Latvian/ Argentinian scenario.