EU, IMF agree €20bn rescue loan for Romania

BRUSSELS - The European Union and International Monetary Fund agreed the basis for a €20 billion rescue loan for Romania on Wednesday (25 March) as the government struggles with falling tax receipts and rising unemployment payments.

The move brings to three the number of EU countries that have turned to IMF and EU aid as a result of the economic crisis, with Latvia and Hungary already securing financial support.

Under this latest deal, the IMF will contribute €13 billion to the loan while the EU will contribute €5 billion. A further €1 billion will come from the World Bank, with the remaining €1 billion coming from the European Bank for Reconstruction and Development and other multilateral lenders.

The EU contribution will come from its balance of payments facility that EU leaders agreed to double last Friday from €25 to €50 billion.

However the commission needs to prepare the necessary paperwork before it can raise the extra €25 billion by issuing bonds to investors, leaving the fund with €10 billion for the moment once Romania's loan, alongside those of Latvia and Hungary, are subtracted.

"I am pleased that it was possible to come to an agreement rapidly on a significant financial assistance package," said economy commissioner Joaquin Almunia on the Romanian deal, indicating that the loan was conditional on the government implementing "a major programme of economic adjustment".

Mr Almunia was referring to an economy policy programme that the Romanian authorities must implement in order to receive the financial support necessary to recapitalise banks and withstand short-term liquidity pressures.

A major component of the plan will see the Romanian government limit its budget deficit in 2009 to 5.1 per cent of GDP, eventually bring it below three per cent by 2011.

The exact details of the loan conditionality will be spelt out in a memorandum of understanding that is still in negotiation between the lenders and the Romanian authorities.

Cut in public sector spending

Cuts in public sector spending appear inevitable however if the Romanian government is to meet the agreed targets, raising the spectre of social unrest.

"One of the conditions is likely to be the signing of an integrated salary law," Sorin Ionita of the Romanian Academic Society think-tank told EUobserver.

Mr Ionita says the government is likely to target public sector bonuses rather than forced layoffs in big state enterprises, many of which have already been privatised in recent years.

However, last week, the Romanian transport ministry announced its intention to lay off 12,000 of the railway's 76,000 staff.

The need for unpopular austerity measures is likely to further weaken the current centre-left coalition, which was elected last November and which has already suffered a string of setbacks, with two interior ministers resigning this year.

"People are slightly less hysterical towards the IMF [than in South America], but it is still not popular," said Mr Ionita, adding that the government would likely draw public attention to the EU side of the loan.

Two EU governments have already fallen as a result of the financial crisis and economic downturn.

The Belgium government was the first to go last December after former Prime Minister Yves Leterme offered his resignation over allegations his officials tried to stop judges blocking the proposed sale of Belgian assets in the multinational bank Fortis.

In February of this year the Latvian government followed suit and on Monday the Hungarian prime minister offered to stand down if a replacement can be found, a move that would bring the total to three.