Charge of the greenhorns

Romania’s new government is preparing to issue its first Eurobond since its “second revolution” in the November election. This time, the issuer is an inexperienced finance ministry which has seized the management of sovereign debt issues from the National Bank.

At the Frankfurt roadshow on March 12 for Russia’s Deutschmark issue, two Romanians went unrecognised as they watched from the sidelines. Guided into discreet meetings in a conference ante-room inside Deutsche Bank’s headquarters, the two visitors were introduced to emerging markets specialists at several investment banks. It was a new experience for Ionut Costea, Romania’s deputy finance minister, and head of issuance Mihai Tanasescu.

Yet within weeks, Costea and Tanasescu will be launching their own Eurobond. They have gained confidence quickly. When Romania’s pioneer Deutschmark issue was first announced in early March it was expected to be worth Dm500 million. After the Russian road show, the talk is of Dm750 million.

This will be just the start of a new borrowing programme for Romania. The government aims to raise $3.2 billion this year, and up to $2 billion of this through the international capital market. After the Deutschmark issue, the finance ministry says a Yankee issue may follow.

It seems a good time for Romania to tap the markets. The country’s standing with international investors has improved since 1995, when 18 months was the maximum maturity Romania could borrow. Now even Romanian corporates are borrowing US dollars over five years.

A first sovereign rating was awarded last March. With BB- from Standard & Poor’s and the equivalent Ba3 from Moody’s, Romania remains a speculative investment. But it is only one notch lower than Russia, whose Dm2 billion issue in mid-March was reasonably successful.

Euphoria still counts for a lot in Romania after the surprise election victory of the centre-right coalition led by president Emil Constantinescu and prime minister Victor Ciorbea. No-one in Bucharest doubts that the new government plans radical reform after the torpor of the early 1990s, but their lack of experience is a worry.

Seven years have passed since Nicolae Ceausescu’s communist dictatorship was overthrown. Twice the Romanian people democratically elected Ion Iliescu, a former associate of Ceausescu’s, as president. But Iliescu’s government failed to reform the economy, which still bears most of the hallmarks of a command economy. No effort was made to eliminate corruption. Political opponents were sidelined from government and administration.

In Bucharest today, it is politically expedient to have had no links with the discredited Iliescu or the unmentionable Ceausescu. But that means experience is lacking in key positions: Ciorbea’s government faces a recruitment crisis.

Take Costea, now state secretary in the finance ministry. Bankers in Bucharest look blank when asked about Costea’s background; he seems to have been unknown before last November. In fact, he was a middle-ranking government servant in the finance ministry budget department. The election offered an opportunity for advancement; Costea transformed himself into a politician and leapfrogged his former boss, Tanasescu, into the number two position. Likewise Mircea Ciumara, now finance minister, has emerged from obscurity as deputy director Bucharest’s World Economics Institute.

At the finance ministry’s grandiose and crumbling headquarters on Ceausescu’s flagship Boulevard of Socialist Victory (later renamed Unity Boulevard), Ciumara’s team works hard, but still has much to learn about capital markets. (“They don’t even know what a convertible bond is,” frets one London investment banker.)

Yet no sooner had these greenhorns moved into Unity Boulevard, they took over the responsibility of sovereign debt issuance from the National Bank, which brought Romania back to the international capital market last year with Eurobond and samurai sovereign issues, raising a total of $1.5 billion.

With hindsight, the international investment bankers who worked with the National Bank now praise the experience of Governor Mugar Isarescu, deputy governor Vladimir Soare and chief economist Daniel Daianu. But these three are now almost excluded from the fund-raising process; all negotiations and planning are handled by the finance ministry and its advisers. The finance ministry believes the National Bank’s borrowing costs were too high, and is determined to reduce them.

Lack of cash prevents the Romanians from paying investment banks for their advice. Advice comes from US Treasury professionals who have been working at the finance ministry since 1993, courtesy of the US development aid programme.

It is not clear how much influence they have. The invitation for tender is described by investment bankers as “very professional”, and is clearly the work of the Americans. Yet when asked for the name of the chief US adviser based permanently at Unity Boulevard, Tanasescu has to shuffle through a pile of papers on his desk to supply it.

The ministry is keen to run a fair and transparent contest for the lead management of the Deutschmark issue. In the past, Merrill Lynch was prominent in both Romanian sovereign issues and lead managed recent US dollar issues for the Romanian Commercial Bank, a state-owned bank, and a private placement for Renel, the electricity distributor.

But this time the issuer has asked four investment banks ­ Merrill, JP Morgan, Credit Suisse First Boston and Deutsche Morgan Grenfell ­ to supply bids by tender. It seems likely Deutsche Morgan Grenfell and CSFB will be appointed as joint leads by a ministry eager to establish contacts with new banks.

DMG and CSFB were appointed by the Russian Federation for its recent Deutschmark issue. They will be keen to prove that demand for emerging markets is still strong enough after a slightly disappointing Russian issue on March 13.

Some investment bankers say Russia’s Dm2 billion issue came right at the tail end of the bull market for Dm-denominated debt from emerging-market issuers. They expect Romania will have it much harder. The latent demand for speculative issues will have to hold up if the Romanian bond is to succeed.

Last year, the outlook on Romania was gloomy. The World Bank and the IMF suspended loans because the old government failed to keep its reform promises.

Romania’s rating might have gone down by now if the new government had not shown such strong enthusiasm for reform. And the rating agencies hint they are unlikely to revise their gradings upwards until substantial reforms are achieved.

All hopes are pinned on the government. First, Ciorbea displayed his mettle by doubling fuel prices in January and increasing them by a further 50% in February in order to break the state subsidies and keep controlled prices in line with the falling leu, Romania’s non-convertible currency. As a result inflation quickened to 14% in January and 20% in February. Now the government has to push the monthly price rises down to 2.3% by the end of the year, in order to meet its IMF targets.

In February the state stopped supporting the leu and let it fall to a natural level against the US dollar. That will automatically create bankruptcies among unviable companies and allow the economy to begin working along market lines.

As a result, the economy is expected to shrink by around 2% this year, after growth of 4.1% last year and more than 7% in 1995. At the same time, the government will reduce spending and cut subsidies in order to shrink its budget deficit and meet other goals set by the World Bank.

The new budget deficit target for 1997 is 4.5% of GDP, after a 6% deficit last year (the 2% target agreed with the IMF was ignored by the old government). The success of these moves depends on whether the finance ministry treats the domestic bond market as a source of income or as a proper mechanism for borrowing.

In the past, the National Bank was not independent and was obliged by the government to lend funds to local banks to buy domestic T-bills. Thus the domestic market became an extension of the budget deficit and depleted foreign currency reserves.

Now the finance ministry has pledged to honour the central bank’s independence and also plans to improve the domestic bond market by selling issues by auction, appointing 10 to 15 primary dealers and creating a secondary market. International banks are already expressing interest in domestic bonds.

Yet it is uncertain whether borrowing in the domestic market will expand, thus increasing Romania’s borrowing in a currency which is devaluing. Given the sinking value of the leu, any domestic borrowing might be dangerous; most of the $3.2 billion the government needs to borrow this year should be in hard currency.

One billion dollars is already earmarked for the National Bank’s reserves, still low at $800 million despite the $500 million increase after a bond issue last year. In addition, the government needs $1 billion to cover the budget deficit and a further $1.2 billion to repay hard-currency debt.

The government has to privatize at least two state-owned banks by the end of the year and begin selling off thousands of other companies which remain in state hands.

If all this is achieved, the IMF will release loans of about $400 million over one year, subject to approval by its board in April. Another $600 million may be forthcoming. Since the renewal of these funds signals approval from the world’s financial authorities, getting these loans is probably even more important to the Romanian government than launching a successful bond issue.

In mid-March, after the IMF and World Bank delegations left Romania having agreed a programme of reforms, the country suffered a crisis. After months of warnings, the government finally cut off subsidies to agriculture, in line with World Bank conditions. Infuriated farmers reacted by letting their pigs starve slowly to death ­ and inviting television cameras to witness their suffering.

Bankers in Bucharest say the Romanian reforms must go through, because there is no alternative apart from a return to state socialism. But the hesitation and inexperience among ministers and government officials puts the bond issue in doubt.

When the Deutschmark bond was first announced in early March, Ciorbea said it would probably come to market within two months. Now, although the finance ministry is making solid preparations for an issue as early as April, the time schedule has been quietly dropped.

Unless the reforms have produced real results by May, international investors may have to wait considerably longer before meeting Costea and Tanasescu.