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Romania: Retail defaults put banks in jeopardy

As much as bankers complain about politicians, the country’s biggest problem might be the banks themselves. Whoever is to blame, financial collapse could be just around the corner. Dominic O’Neill reports.

ROMANIA’S EMBATTLED GOVERNMENT is trying whatever it can to reassert its wavering grip on power, including attacks on the financial sector. But the banks might not be able to afford cuts any more than ordinary individuals can afford IMF-led austerity measures. In less than two years retail defaults have pushed non-performing loans in Romania to more than 20% and rising. Now analysts think a populist emergency ordinance on consumer credit could cost banks another €500 million – perhaps enough to push some of them over the edge.

As part of its 2009-11 €20 billion IMF and EU crisis-support package, Romania must lower its budget deficit to 4.4% of GDP in 2011 from 7% or more in the past three years. Last summer the government cut public-sector wages by 25% and fired 70,000 of its 1.4 million state employees, with plans for 15,000 more redundancies in 2011. The constitutional court blocked plans to cut state pensions by 15%, so instead the government increased the value-added tax rate by five percentage points to 24%.

But in late October lawmakers (including government ministers) voted to cut VAT on food: “in error,” according to the finance ministry. As Euromoney went to press, the president still had the opportunity to block the cut, or alternatively enact another emergency ordinance.

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