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BUCHAREST, April 7 (Reuters) - Romania’s central bank governor stepped up warnings on Thursday against proposed legislation that would allow property-buyers to walk away from their mortgage debts, saying the plan posed a growing threat to the economy.
“The central bank has identified for the first time a severe systemic risk,” Governor Mugur Isarescu told a news conference to present a regular report on Romania’s financial stability.
“Over the last six months, legislative initiatives seeking to regulate the financial-banking sector by retroactively intervening in contracts between banks and clients have intensified.”
Isarescu had warned in March that Romania, one of the European Union’s poorest states, has never seen bigger economic threats in the past 25 years, referring to the post-Communist era. The International Monetary Fund and the European Commission have also expressed concern about domestic policies in the run-up to two elections later this year.
Parliament approved a bill in late 2015 that would enable Romanians to give up their mortgaged properties and stop paying loans, but President Klaus Iohannis urged parliament to reconsider it after the central bank, the European Central Bank and the IMF all said it posed a major risk to the banking sector and wider economy.
Parliament’s lower house is expected to approve the bill later this month and while some provisions have been slightly toned down, the bill would still apply retroactively, going against European norms.
Deputy Governor Liviu Voinea said the bill could drive banks to raise the required down payment for mortgaged loans to unsustainable levels, trigger a ratings downgrade, raise funding costs for sovereign debt and lead to lower economic growth.
At the peak of a real estate market boom in 2008, it would have taken the average Romanian 22 years to afford a house, compared to 7 years currently, Voinea said, as lower prices and funding costs boosted Romanians’ access to property. The mortgage relief bill would drive costs back up, he said.
Central bank data showed there were 495,000 mortgage or other loans with real estate guarantees worth a total of 70.8 billion lei ($18 billion) at the end of 2015.
The bank also saw risks from public sector wage hikes last year and a series of tax cuts, some already implemented and others agreed for next year, and noted that the regional economy could be buffeted by financial turbulence from Britain’s referendum on whether to leave the EU. ($1 = 3.9184 lei) (Reporting by Luiza Ilie; Editing by Ruth Pitchford)