Romania and the International Monetary Fund have agreed terms for a 20 billion euro aid package, a ruling coalition source said on Tuesday, in a bid to avert a financing crisis in one of the EU's poorest states.
The deal, making Romania the third of the EU's eastern members to be bailed out in the financial crisis after Latvia and Hungary, is expected to be approved officially by the government on Wednesday.
Economists say the package, which allows a government budget deficit of 4.6 percent of GDP, should calm jittery 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.
"There is no way out of a major macroeconomic adjustment, but an IMF programme clearly is helpful in avoiding a wider financing crisis," said Danske Bank economist Lars Christensen.
A mission from the Washington-based lending body is in Bucharest to discuss a joint loan package with the European Commission for Romania, hit by a huge current account deficit and resulting dependence on external financing.
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.
Economists blame an unrestrained spending spree by the private sector and consumers and loose fiscal and wage policies in recent years, which had fanned a vast external imbalance.
"Both sides agreed on a deficit goal of 4.6 percent of GDP (gross domestic product)," a senior ruling coalition official who saw the draft letter of intent told Reuters.
"This is because of the Fund's estimation of a 4 percent contraction for the Romanian economy."
LONG-TERM HOPE
Talks with an IMF mission which came to Bucharest two weeks ago have been kept under wraps, with few details announced publicly so far.
This has prompted observers to say the centre-left coalition was concerned about sparking social unrest by announcing tough social spending cuts, which many economists said would likely accompany a deal.
But the large deficit, barely below last year's 5.2 percent, signals the IMF acknowledging that the deep public sector reforms needed to cut spending significantly may be difficult at a time when global economic pain is hurting ordinary Romanians.
Economists say a large budget deficit, above the European Union's 3-percent limit, may be key to preventing a deeper recession this year by propping up the private sector.
"We had expected quite a large budget deficit to be agreed with the IMF, of around 4 percent," said Nicolaie Alexandru-Chidesciuc, senior economist at ING Bank in Bucharest.
"The higher the deficit, the bigger the chances the Fund is acknowledging (a) significant deterioration of Romania's economy and the lower the pressure to hike taxes and aggressively cut spending."
Reaction from trade unions was mixed over the last week, as details of the talks began to seep out, with several still threatening strikes if public wages and bonuses are cut.
Initially, Bucharest's government, in office since December, had pledged to slash the deficit to counter international criticism of fiscal laxity.
But as economic data in recent months signalled recession this year, it began looking for more fiscal stimulus.
Prime Minister Emil Boc has said his cabinet will approve the official letter requesting the package on Wednesday. The letter will be discussed by the IMF board on May 4.
The country's leu currency was unmoved by the details of the rescue, which were broadly in line with earlier signals from officials on the size of the backing the IMF would provide.
At 1230 GMT it traded at 4.2900 per euro, compared with January's record low of 4.353.
