(Adds Romanian govt comments)
BUCHAREST, March 25 (Reuters) - Romania has secured a 20 billion euro aid package from the International Monetary Fund and the European Union in a bid to thwart a financing crisis and stabilise its stricken economy.
The country of 22 million people on the EU’s eastern frontier is the third member of the bloc to be bailed out after Hungary and Latvia, as world financial turmoil wipes out sources of funding for an economy heavily reliant on foreign cash.
Economists say the package, in the works for weeks, should underpin wobbly markets and ease pressure on the domestic leu currency, trading near record lows against the euro since the start of the year.
But while it leaves scope for public spending to bolster the economy, the loan is unlikely to prevent Romania from slipping into recession this year as the global crisis chokes off manufacturing and domestic consumption.
The Fund acknowledged the bleak economic prospects for Romania, already one of the European Union’s poorest countries in per capita terms, but said aid would limit the impact of global woes.
“In (the) current world economic environment ... the financing gap has opened up,” the Fund’s mission chief Jeffrey Franks told reporters. “With international support, the adjustment will be cushioned and we are hoping to avoid the worst and have a gradual adjustment over time.”
The package includes 12.9 billion euros of IMF money and 5 billion euros from the EU as well as funds from the World Bank and the European Bank for Reconstruction and Development. Romania would be able to draw 5 billion euros after the approval of a 2-year standby agreement in the board, the Fund said.
The money is conditional on a broad package of fiscal reforms, which the IMF said were crucial to ensuring long-term stability.
However, analysts pointed to Romania’s record of breaking the terms of deals with the Fund, saying plans for any deep overhaul of public finances may founder. They also said the economic outlook would dominate markets’ thinking.
“I do not see how the deal could erase expected economic recession likely due this year,” said Nicolaie Alexandru-Chidesciuc from ING Bank in Bucharest.
For Boc’s broad coalition of former foes the deal may be a lifeline to surviving the crisis after it swept into power in December, inheriting an overheated economy with vast external imbalances and a public wary of budget cuts and economic pain.
Over several months, Romania has moved from an attractive destination for foreign investment as manufacturers poured in to benefit from fast rates of growth, to an economy plagued by ballooning debt and sour market sentiment.
Thousands of workers have been laid off and several top factories have announced work stoppages in recent months.
Economists blame an unrestrained spending spree by the private sector and consumers, as well as loose fiscal and wage policies, for fanning a vast external imbalance that made Romania highly vulnerable.
That has left Boc with a dilemma on how to ensure access to funding without making painful cutbacks and angering the public after making lavish election-time spending promises.
The aid package gives gives him some breathing room by allowing him to run a budget deficit barely below last year’s 5.2 percent of gross domestic product (GDP). It also envisages cutting spending by roughly 1 percent of GDP.
“This deal is by far better than any deals reached by countries around us, because ... it also has a social component,” Boc told reporters after signing a letter of intent for the aid.
The IMF said the deal will help Romania cut budget deficit gradually to below the EU’s ceiling of 3 percent by 2011, a statement also backed by the European Commission.
It said public sector wage and pension policies required a vast overhaul to introduce transparency and control spending.
“The conditions agreed upon are ambitious but realistic,” the IMF’s Franks said.
Moody’s Investors Service said the agreement will help the economy maintain its current credit levels, now at Baa3.
The leu won a modest boost from news of the agreement, trading at 4.2770 per euro EURRON=, compared with January's record low of 4.3530. The cost of insuring Romanian debt against restructuring or default, measured with five-year credit default swaps, fell by around 50 basis points to 475-525 basis points.
President Traian Basescu said the currency should firm slightly as a result of the country’s financial aid agreement, with an additional push foreseen for May when the first tranche of the loan is expected to feed central bank reserves. (Additional reporting by Radu Marinas and Marius Zaharia; Editing by Stephen Nisbet)
Our Standards: The Thomson Reuters Trust Principles.