Both Government Spending And Loans Will Shrink In 2012: So How Do We Boost The Economy?

11.29.2011 By Razvan Voican

The big question in 2012 is how do we inject “financial substance” into the economy when the current fiscal policy sends out a procyclic impulse toward contraction, while bank loans are getting costlier due to a shortage in external liquidity?

Claudiu Cercel, Financial Markets Executive Director with Romania's second largest lender BRD, said the authorities should look for alternative financing channels, because the government won't be able to rely on large budget spending, and neither on generous bank loans nor on other types of local financing, for that matter. The government should think outside the box and use more innovative mechanisms, including those tangent to the capital market, he added.

"In 2012, the (economic) evolution will be procyclic, both regarding the fiscal policy and the availability of bank financing," the BRD official said.

Moreover, the chances to witness cheaper loans are slim, particularly when it comes to loans in euros. "The loans will not be cheaper, quite the opposite."

So what can be done to maintain access to at least loans in lei?

"The central bank must strengthen its position as net creditor for the banking system and inject liquidity in the market," Cercel said.

Local banks have a significant exposure to government bonds and they can easily access refinancing loans from the central bank. In fact, the central bank has been pumping cash into the market on a regular basis for the past seven weeks to increase liquidity and lower interest rates.

As for BRD, the bank's exposure to government bonds exceeds EUR1.3 billion, equal to around 12% of its assets, according to Cercel.

The bank is well capitalized and there is no danger for its financing lines to be cut off by the mother-bank, France's Societe Generale, he said. "The financing lines remain, but we must consider expanding our resource pool outside the group, without turning it into a brutal process."

Societe Generale covers around 16% to 17% of BRD's financing needs. The Romanian lender contemplates tapping into foreign debt markets in 2012 by launching medium-term bonds of up to EUR600 million.

Setting up a public-private financing vehicle is another solution to boost the economy

The government could create a special financing vehicle to stimulate economic growth by attracting external investments, Cercel said. The state would contribute with assets from its infrastructure projects, while local banks would provide financing.

"It would also require an established manager, such as Franklin Templeton, with experience in infrastructure and who will be able to issue bonds on international markets," the BRD official said.

The new financing entity could develop and run infrastructure projects, it could resell them or develop them in a BOT (build, operate, transfer) regime, he added.

(English version by Florentina Dragu)