Proposal for a Council decision providing EU medium-term financial assistance for Romania
Date: 2009-04-21
Institutions: European Commission
Subjects: EU aid, EU financial instrument, EU programme, European social policy, Romania, accession to the European Union, economic aid, economic recession, economic stabilisation, economic support

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.4.2009 
COM(2009) 199 final 

Recommendation for a 

COUNCIL DECISION 

Granting mutual assistance for Romania 

Proposal for a 

COUNCIL DECISION 

Providing EU medium-term financial assistance for Romania 

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Recommendation for a 

COUNCIL DECISION 

Granting mutual assistance for Romania 

and 

Proposal for a 

COUNCIL DECISION 

Providing EU medium-term financial assistance for Romania 

EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION 

Romania has  experienced a  very  high  economic growth over the last years, averaging 6.5% 
since  2002,  and  even  reaching  7.1%  in  2008.  Growth  has  been  mainly  driven  by  domestic 
demand  for  consumption  and  investment,  fuelled  by  a  foreign-financed  boom  in  financial 
intermediation, and strong wage growth. High external borrowing has led to a rapid build-up 
of  external  debt,  reaching  53%  of  GDP  end-2008,  and  widespread  foreign  currency  lending 
has increased households' and companies' balance sheet vulnerability to sudden shifts in the 
exchange  rate.  Domestic  demand  pressures  have  been  further  exacerbated  by  a  pro-cyclical 
fiscal policy, with net public borrowing soaring from 1.2% of GDP in 2005 to 5.4% of GDP 
in 2008, despite successive Council Opinions and the June 2008 Commission Policy Advice 
calling for fiscal consolidation and for an improvement of budgetary management.  

increased  risk-aversion 

The  global  economic  downturn  and 
towards  home-grown 
vulnerabilities has resulted in a significant tightening of capital flows to Romania. Pressures 
on  the  exchange  rate  have  increased,  resulting  in  a  more  than  30%  cumulative  depreciation 
since August 2007. In the fourth quarter of 2008, domestic demand contracted by more than 
4% yoy, mainly driven by a decline in private consumption, from double digit growth rates in 
the  first  three  quarters.  In  addition,  external  competitiveness  and  productivity  developments 
have been hampered by the slow pace of structural reforms undertaken since EU accession. 
The government is also facing increasing difficulties on the bond market with average yields 
up by about 300bps since one year ago and almost entirely based on short-term maturities.  

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Against this background, on 6 March 2009, the Romanian authorities1 have requested Balance 
of Payments support to the EC and have also approached the IMF and the World Bank with a 
similar  request.  While  at  the  moment  there  is  no  acute  crisis,  they  consider  that  external 
financial support at this stage is warranted to enhance Romania’s foreign reserve buffer, based 
on a scenario  of significant strains on  external financing for both the public and the private 
sector  in  the  coming  two  years.  A  programme  would  also  contribute  to  strengthening 
confidence in Romania’s ability to meet its external obligations.  

The  Commission  together  with  the  Council  Presidency  announced  on  9  March  that  the  EU 
was  ready  to  participate  with  the  IMF  in  a  coordinated  financing  package  to  underpin 
Romania's balance of payments stability. However, it was stressed that the financial assistance 
is  contingent  upon  a  strong  commitment  by  the  Romanian  authorities  to  implement  a 
supportive policy programme.  

Based on discussions with the Commission and the IMF, the Romanian authorities will send a 
Letter  of  Intent  to  the  Commission  and  to  the  IMF  highlighting  the  key  elements  of  their 
economic adjustment programme. Council financial assistance to Romania is conditional on 
receipt of this letter. The principal aim of this adjustment programme is to cushion the effects 
of the sharp drop in private capital inflows while implementing policy measures to address the 
external and fiscal imbalances and to strengthen the financial sector. Against the background 
of  this  programme,  the  parent  institutions  of  the  nine  largest  foreign-owned  banks 
incorporated  in  Romania  subscribed  to  a  coordinated  commitment  to  maintain  their  overall 
exposure to Romania and to provide additional capital as necessary. 

2. 

MACROECONOMIC DEVELOPMENT AND OUTLOOK 

After  several  years  of  strong  GDP  growth,  averaging  6.5%  yoy  since  2002,  growth  has 
declined sharply in the fourth quarter of 2008 to 2.9% yoy. This has been mainly driven by a 
contraction of private consumption by almost 4% yoy, which came alongside a virtual stop in 
bank  lending.  In  the  fourth  quarter,  gross  fixed  capital  formation  sharply  decelerated  from 
over  30%  yoy  in  the  first  quarter  to  just  below  3%.  On  the  supply  side,  the  slowdown  was 
driven by a contraction in the industrial sector by about 8%, from an expansion by 5.5% in 
Q1-2008. Construction and services also registered a sharp slowdown.  

The sharp decline in domestic demand in the fourth quarter also led to decelerating imports, 
with yoy growth rates turning negative toward the end of the year (-18% yoy) and registering 
even  further  declines  in  January  2009  (-28%  yoy,  in  RON  terms).  Export  performance  also 
weakened significantly (-8% yoy in December 2008 and -13% in January 2009). Overall, in 
2008, the current account deficit slightly narrowed, but still remained at a high level of 12.3% 
of GDP, from 13.5% of GDP in 2007. On the financing side, FDI covered about 54% of the 
current account deficit in 2008. The remainder was mainly financed through (mostly private) 
external debt, which increased to around 53% of GDP end-2008.  

During  the  economic  boom,  labour  shortages  attributable  to  large  migration  outflows  and  a 
relatively  high  proportion  of  unskilled  workforce  contributed  to  the  emergence  of  a  wage-

1 

In  line  with  the  Terms  of  Reference  on  non-Community  loans  to  EU  Member  States  adopted  by  the 
EFC  on  29  September  2008,  this  was  done  by  a  letter  of  Finance  Minister  Gheorghe  Pogea  to 
Commissioner  Joaquin  Almunia.  A  similar  letter  was  written  by  EFC  Member  Stefan  Nanu  to  Odile 
Renaud Basso and Marco Buti, respectively Secretary of and Commission Member at the EFC. 

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price spiral, with wage growth outstripping the poor productivity developments. Wage growth 
remained  very  strong  in  the  first  two  quarters  of  2008  (with  nominal  wages  increasing  by 
around  25% yoy),  but  have  moderated  since,  reaching  13%  yoy  in  January  2009. 
Notwithstanding falling commodity and food prices, CPI inflation picked-up again from 6.3% 
in  December  2008  to  6.9%  in  February  2009  on  the  back  of  an  8%  nominal  effective 
depreciation over this time span.  

Given the sharp slowdown of economic activity in the fourth quarter of 2008 and the likely 
further weakening of the global economic outlook, GDP growth is projected to turn negative 
in 2009 to around -4%, driven by the contraction in consumption and investment, partly offset 
by a correction of the external deficit.  

3. 

PUBLIC FINANCES 

Romania  pursued  a  pro-cyclical  fiscal  policy  during  the  demand  boom  between  2005-2008, 
with headline deficits rising from 1.2% of GDP in 2005 to 5.4% of GDP in 2008, amidst an 
average  real  GDP  growth  of  6.5%  and  against  repeated  advice  given  in  the  February  2008 
Council  Opinion  on  Romania's  Convergence  Programme  and  the  June  2008  Commission 
Policy  Advice.  This  was  due  to  a  large  degree  to  overall  weak  budgetary  planning  and 
execution. Windfall revenues were typically spent through the process of intra-year budgetary 
rectifications and no additional headroom was left for more difficult times. Weaknesses in the 
public  administration  also  contributed  to  a  recurrent  under-execution  of  plans  for  capital 
expenditure  and  part  of  the  resources  budgeted  for  investment  were  subsequently  shifted  to 
current  spending  such  as  public  wages  and  social  transfers.  Public  sector  wage  growth  has 
become  the  driver  of  private  sector  wage  increases,  with  wage  levels  higher  in  the  public 
sector.  Over  the  period  2005-2008  the  public  sector  wage  bill  doubled  in  nominal  terms. 
Finally,  large  expenditure  outlays  are  concentrated  in  the  last  weeks  of  the  year,  severely 
affecting  budgetary  credibility  and  predictability.  Despite  the  recommendations  of  the  June 
2008  Commission  Policy  Advice,  no  progress  has  been  made  with  the  implementation  of  a 
binding medium-term fiscal framework. 

The 2009 budget submitted by the new Government and adopted by the Parliament at the end 
of February contains several measures with the aim of cutting the deficit from 5.4% of GDP 
in 2008 to 2.0% of GDP in 2009, against a 2.5% real GDP growth assumption. The measures 
include freezing recruitment and cutting various bonuses in the public sector, a reduction in 
the expenditure for goods and services, limiting increases of public sector wages and linking 
pensions  to  inflation  rather  than  to  wage  developments.  On  the  other  hand,  the  government 
plans  a  substantial  increase  in  public  investment.  However,  at  the  date  of  adoption  it  was 
already  clear  that  this  deficit  target  was  unrealistic,  notably  given  that  the  underlying 
macroeconomic scenario and the revenue projections were too optimistic. In addition, in the 
absence  of  a  comprehensive  reform  of  expenditure  policy, 
there  were  potential 
implementation risks concerning the spending measures. 

4. 

FINANCIAL MARKETS 

Romania's  financial  system  is  dominated  by  the  banking  sector,  which  has  developed  very 
quickly  over  the  last  couple  of  years.  Total  net  assets  of  the  Romanian  banking  sector 
amounted  to  some  RON  315  billion  at  the  end  of  2008  (62%  of  GDP).  Banks  are  largely 
foreign owned. In December 2008, credit institutions with majority foreign capital (including 
foreign  bank  branches)  controlled  around  88%  of  total  net  assets  of  all  credit  institutions 

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operating in Romania. Banks from Austria, Greece, France and Italy are the most exposed in 
Romania. 

During the last few years, the Romanian banking sector promoted fast credit expansion with 
loans-to-deposit ratio increasing to 122% in 2008. Although credit growth started from a low 
base, the expansion of mainly foreign currency-denominated loans (representing some 59% of 
total domestic credit to the private sector in January 2009) made the Romanian banking sector 
heavily dependent on foreign  financing. In  the second half of 2008, lending activity slowed 
dramatically,  with  annual  credit  growth  falling  from  above  60%  in  June  2008  to  36.5%  in 
December 2008. 

Although  at  the  moment  the  banking  sector  remains  apparently  relatively  sound  and  well- 
capitalised (with the capital adequacy ratio at 12.3% at the end of 2008), financial stability in 
Romania could come under strain. The deteriorating macroeconomic outlook implies that the 
share  of  non-performing  loans  is  likely  to  increase  rapidly  in  the  coming  months. 
Furthermore,  as  the  Romanian  private  sector  is  heavily  relying  on  foreign  currency-
denominated credit, any further depreciation of the leu would weigh heavily on household and 
enterprise balance sheets. 

5. 

BALANCE OF PAYMENT AND EXTERNAL FINANCING REQUIREMENTS  

Romania's  economic  boom  in  recent  years  was  characterized  by  the  emergence  of  large 
external imbalances and an unsustainable build-up of external liabilities. The current account 
deficit increased from 5.8% of GDP in 2004 to 13.5% of GDP in 2007 and remained at above 
12% of GDP in 2008. As a result, gross external debt reached 55% of GDP at the end of 2008.  

Romanian  financial  markets  have  been  under  continued  pressure  since  the  beginning  of 
October  2008.  Deleveraging,  Romania's  weak  fundamentals  and  sub-investment  grade  are 
weighing  heavily  on  currency,  interbank,  equity  and  bond  markets.  External  financing  is 
expected  to  remain  under  significant  pressure  for  some  time  as  the  persistent,  although 
declining, current account deficit, together with the need to roll over sizeable short-term and 
longer-term foreign currency-denominated debt, are likely not to be covered fully by FDI and 
other financial and capital account inflows in 2009-2011.  

In  light  of  the  above,  the  Commission  is  of  the  opinion  that  there  is  a  serious  threat  to  the 
Romanian balance of payments. The Commission thus recommends to the Council a decision 
granting mutual assistance. Total financing needs in the period up to the first quarter of 2011 
are  estimated  at  EUR  20  billion.  This  sum  comprises  allowance  for  the  expected  continued 
current  account  deficit,  incomplete  rollover  of  maturing  loans,  some  capital  outflows  and 
official foreign reserve accumulation to a prudent level. Foreign banks’ rollover rate of their 
exposures to Romania is assumed at 100% once the mutual assistance is awarded, consistent 
with the required commitment of main foreign banks to maintain their exposure to Romania 
(as  confirmed  in  their  joint  statement  of  26  March  2009),  whereas  the  rollover  rate  for 
corporate external debt to parents and for external debt of Romanian banks is assumed at 50% 
in 2009. For 2010 and 2011, all maturing foreign liabilities are assumed to be rolled over at 
100%  in  line  with  the  expected  financial  market  stabilisation  and  start  of  the  recovery  in 
Romania's major export markets. Apart from sufficiently high foreign exchange reserve target 
(of  more  than  100%  of  short-term  external  debt  at  remaining  maturity)  conservative 
assumptions  were  made  about  other  capital  outflows  such  as  non-resident  deposit  outflows, 
decreases in trade credits and portfolio outflows in order to incorporate additional buffers into 

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the  calculations.  The  underlying  GDP  growth  assumption  is  -4%  in  2009  and  about  0%  in 
2010. The current account deficit is projected at 7½% of GDP in 2009 and 6½% of GDP in 
2010. 

6. 

EU  SUPPORT  UNDER  THE  BALANCE  OF  PAYMENTS  FACILITY,  PART  OF 
INTERNATIONAL EFFORT 

In the light of the serious balance of payments difficulties being experienced by Romania and 
conditional on the Romanian authorities' firm commitment to implement a major programme 
of fiscal, financial and structural adjustment, the Commission, following consultation with the 
Economic  and  Financial  Committee  on  17  March  2009,  recommends  the  Council  grant 
mutual assistance foreseen by Article 119 of the Treaty. 

Furthermore,  the  Commission,  following  consultation  with  the  Economic  and  Financial 
Committee,  proposes  that,  after  adopting  the  above-mentioned  decision  of  the  Council  to 
provide  mutual  assistance  to  Romania  on  a  recommendation  from  the  Commission,  the 
Council adopt a decision providing under the EU facility for Member States (as governed by 
Council  Regulation  (EC)  No  332/2002  of  18  February  2002)  a  medium-term  financial 
assistance  to  Romania  of  up  to  EUR  5  billion  to  underpin  its  balance  of  payments 
sustainability. 

Medium-term  financial  assistance  for  Romania  under  the  balance  of  payments  facility  for 
Member  States  (in  view  of  Regulation  No  332/2002)  appears  to  be  appropriate  under  the 
current circumstances of reduced capital inflows and high fiscal and external imbalances. The 
immediate objective is to facilitate an orderly adjustment of the external deficit, thus easing 
excessive  pressures  on  the  exchange  rate  which  could  otherwise  cause  severe  balance  sheet 
effects on the corporate and household sectors, resulting in a sharper recession and strains in 
the banking sector.  

The total estimated financing needs up to the first quarter of 2011 are EUR 20 billion. The EU 
assistance  for  Romania  comes  in  conjunction  with  IMF  support  through  a  Stand-by-
Arrangement (SBA) in the amount of SDR 11.40 billion (about EUR 12.95 billion, 1085% of 
Romania's IMF quota). Additional multilateral support of EUR 2 billion will be provided in 
the following way: on top of their regular lending activities the World Bank provides EUR 1 
billion and the EIB and the EBRD provide another EUR 1 billion.  

On 26 March 2009, the parent institutions of the 9 largest foreign-owned banks incorporated 
in  Romania  jointly  committed  to  maintaining  their  overall  exposures  to  Romania  over  the 
programme  period,  and  agreed  to  support  their  Romanian  subsidiaries  in  order  to  preserve 
their  current  good  financial  standing  throughout  the  period  of  market  turbulences  and 
economic  slowdown.  This  commitment  will  be  reaffirmed  in  the  individual  comfort  letters 
from the key banks to the National Bank of Romania (NBR) which will, in conjunction with 
home  country  supervisory  authorities,  monitor  this  commitment  closely.  The  EU  financial 
assistance  is  provided  in  support  of  the  strong  commitment  by  the  Romanian  authorities  to 
implement  a  comprehensive  economic  programme.  This  programme  has  been  agreed  upon 
with the Romanian authorities.  

The  Commission  will  verify  at  regular  intervals  in  collaboration  with  the  EFC  that  the 
economic  policy  conditions  attached  to  the  assistance  are  fulfilled,  through  missions  and 
regular  reporting  by  the  authorities.  Throughout  the  implementation  of  the  programme,  the 

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Commission  will  also  provide  additional  policy  advice  and  technical  assistance  in  specific 
areas. The main elements of this programme are:  

a. Fiscal consolidation 

The  government  is  committed  to  undertake  additional  fiscal  adjustment  efforts  of 
1.1% of GDP, on top of the measures amounting to 3% of GDP included in the 2009 
budget adopted in February 2009. Based on the revised forecast of a contraction of 
GDP by 4% in 2009 and on the additional budgetary measures, the authorities target 
a  general  government  deficit  of  5.1%  of  GDP,  implying  an  important  structural 
adjustment  compared  to  the  2008  outturn.  An  amended  2009  budget,  based  on  the 
updated  economic  outlook  and  the  further  measures  will  be  approved  by  the 
Parliament in the second quarter of 2009. 

The  fiscal  consolidation  will  be  concentrated  on  the  expenditure  side.  Primary 
government  expenditure  will  be  reduced  by  an  additional  0.85 percentage  point  of 
GDP  compared  to the  2009  budget.  This  will  be  achieved  through  i)  a  cut  (by  an 
estimated 4 – 4½% with respect to the 2008 level) in the public sector wage bill by 
foregoing  public  sector  wage  increases  (totalling  5  percent)  scheduled  for  2009  or 
equivalent further cuts in employment and by reducing public employment, including 
by replacing only 1 in 7 departing employees; ii) additional reduction in spending on 
goods  and  services  and  in  subsidies  to  public  enterprises;  iii)  some  cuts  in  capital 
spending  on  items  like  vehicles  and  office  equipment  and  ensuring  a  realistic 
timetable  for  EU-supported  investment  projects.  Nevertheless,  public  investment  is 
projected to substantially increase in 2009 compared to 2008 (some 6½ % of GDP in 
2009 compared to 5¾% of GDP in 2008). On the revenue side, measures to eliminate 
certain  tax  deductions  and  allowances  (in  particular  on  company  cars,  and 
depreciation  of  revalued  assets)  are  expected  to  generate  an  additional  0.25%  of 
GDP.  The  government  is  committed  to  continue  the  expenditure-driven  fiscal 
consolidation and reduce the deficit further to 4.1% of GDP in 2010 and to below 3% 
of GDP in 2011.  

Throughout the execution of the programme, the Commission will provide continued 
guidance  and  advice  to  the  Romanian  authorities  with  the  aim  of  ensuring  a 
sustainable correction of the deficit.  

b. Fiscal governance reform 

In order to help a sustainable achievement of lower budgetary deficits, measures will 
be taken to improve the budgetary strategy and process. A key-component will be a 
fiscal  responsibility  law,  which  inter  alia  would  require  setting  up  procedures  for 
improved  multiyear  budgeting,  establish  limits  on  budget  revisions  during  the  year 
and  lay-out  fiscal  rules  in  order  to  improve  budgetary  implementation  and  achieve 
full compliance with the requirements of the SGP. The law should also create a fiscal 
council to provide independent and expert scrutiny. 

to 

improve  budgetary  predictability  and 

In  order 
the  public 
compensation system will be restructured, including by unifying and simplifying the 
pay  scales  and  reforming  the  bonuses  system.  This  is  aimed  at  tackling  the  major 
problems  with  the  public  compensation  system:  bonuses  comprise  too  much  of  the 

transparency, 

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total  compensation,  there  is  not  unified  wage  scale  and  there  is  a  large  number  of 
laws regulating wages in different part of the compensation system. 

To  help  improve  the  long-term  sustainability  of  public  finances,  key  parameters  of 
the pension system will be reformed. Changes will include moving toward indexing 
public pensions to consumer prices and limiting the scope for discretionary pension 
increases  and  gradually  increasing  further  the  retirement  age  beyond  the  currently 
agreed  plans  (particularly  for  women),  taking  into  account  the  evolution  of  life 
expectancies.  In  addition,  groups  of  public  employees  currently  excluded  from 
pension  contributions  will  have  such  contributions  phased-in.  The  programme 
foresees  the  continuation  of  the  implementation  of  the  second  pension  pillar  with 
regularly scheduled increases in contributions as originally planned. 

c. Monetary and financial sector policy 

Monetary  policy  will  remain  geared  towards  price  stability  and  the  achievement  of 
the  NBR’s  inflation  target  (currently  3.5%  ±1 percent  at  end-2009).  Regarding  the 
financial sector, the NBR will perform stress tests of individual bank balance sheets 
and  lending  portfolios  under  different  scenarios  following  EU  guidelines  on 
valuation, which will be used to assess the potential increases in own funds needed to 
ensure  that  solvency  ratios  remain  above  10  percent  throughout  the  programme 
period. Once stress tests are completed, in line with their commitment to adequately 
support  their  subsidiaries  (confirmed  in  their  joint  statement  of  26  March  2009), 
parent  banks  will  be  required  to  secure,  by  the  end  of  September  2009,  sufficient 
resources to cover any potential shortfalls revealed by the stress tests. 

Moreover,  the  programme  foresees  that  banking  and  winding-up  laws  will  be 
amended to be able to respond in a timely and effective fashion in the event of bank 
distress. A key objective of the amendments will be to strengthen the powers of the 
administrators of banks placed under special administration. Beyond bank resolution, 
other  measures  aim  at  strengthening  the  NBR’s  remedial  powers  with  provisions 
allowing  it  to  request  that  significant  shareholders  increase  their  share  capital  and 
financially  support  the  bank,  and  to  prohibit  or  limit  profit  distributions.  Financial 
supervision will be strengthened in line with the relevant EU legislation. In addition, 
more  detailed  reporting  requirements  on  liquidity  will  be  introduced  and,  at  an 
appropriate time, the regulatory minimum level of the capital adequacy ratio should 
increase from 8 percent to 10 percent. Furthermore, procedures for the activation of 
deposit  insurance  will  be  modified  to  simplify  and  accelerate  payouts.  Under 
the  NBR’s 
modified 
determination  within  the  21-day  period.  Finally,  in  order  to  guarantee  sufficient 
liquidity provision, the NBR is committed to widening the range of assets acceptable 
as collateral. 

insurance  will  be  activated  upon 

legislation,  deposit 

d. Structural reforms 

The economic programme will also include structural reform measures, in line with 
the  policy  areas  covered  in  the  Country  Specific  Recommendations  issued  by  the 
Council in the in the framework of the Lisbon strategy. Reforms will include policies 
towards  improving  the  efficiency  and  effectiveness  of  public  administration, 
enhancing the quality of public expenditure, sound use  and increased  absorption of 
EU  funds,  the  improvement  of  the  business  environment  and  tackling  undeclared 

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work. The Commission also contributes to local capacity building via the structural 
funds, a specific part of which has been earmarked for technical assistance.  

This  programme  is  reflected  in  the  economic  policy  conditionality  included  in  the 
Commission  recommendation  for  a  Council  decision.  The  detailed  economic  policy 
conditionality  attached  to  EU  loan  disbursements  will  be  set  out  in  a  Memorandum  of 
Understanding to be concluded with the Romanian authorities. This programme will also be 
fully reflected in an update of the Romanian Convergence Programme 

The proposed decision would expire three years after entry into force. To ensure the necessary 
flexibility  in  the  current  market  context,  it  is  proposed  to  allow  the  option  of  using  interest 
rate swaps for the borrowing operation which finances the loan. In order to safeguard the EU 
budget, the counterparties of a potential swap would have to be of the highest credit quality. 

In  line  with  the  stipulations  of  the  Commission  proposal  of  8  April  2009  for  a  Council 
Regulation,  amending  Regulation  (EC)  No  332/2002,  establishing  a  facility  providing 
medium-term financial assistance for Member States' balances of payments, the Commission, 
including the European Anti-Fraud Office, and the European Court of Auditors can send their 
own agents or duly authorised representatives to carry out any technical or financial controls 
or  audits  that  they  consider  necessary  in  relation  to  the  management  of  this  assistance. 
Investigation and satisfactory treatment of any suspected and actual cases of fraud, corruption 
or  any  other  illegal  activity  in  relation  to  the  management  of  the  EC  balance  of  payments 
assistance, detrimental to the EC's financial interests, will be ensured. All such cases as well 
as  measures  related  thereto  taken  by  national  competent  authorities  will  be  reported  to  the 
Commission  without  delay.  The  Memorandum  of  Understanding  and  the  Loan  Agreement 
will  also  already  integrate  the  new  technical  provisions  of  the  Commission  proposal  for  a 
Council Regulation amending Regulation (EC) No 332/2002. 

In parallel to the policy conditionality of this programme, the Commission will also continue 
monitoring  progress  in  the  area  of  judicial  reform  and  fighting  corruption  under  the 
Cooperation and Verification Mechanism. The lifetime of this mechanism is independent of 
the duration of the assistance programme. The February 2009 Interim Report concluded that 
the  Romanian  authorities  should  regain  momentum  on  judicial  reform  and  the  fight  against 
corruption  so  as  to  reverse  certain  backward  movements  of  recent  months.  This  means  in 
particular adopting the codes needed to modernise the legal system and showing, through an 
expeditious  treatment  of  high-level  corruption  cases,  that  the  legal  system  is  capable  of 
implementing the laws in an independent and efficient way.  

In  addition  to  the  policy  conditionality,  the  Commission  will  also  continue  monitoring  the 
correct  use  of  pre-and  post-accession  EU  transfers,  among  others  through  the  compliance 
assessments and regular reviews.  

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Recommendation for a 

COUNCIL DECISION 

Granting mutual assistance for Romania 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, and in particular Article 
119, 

Having  regard  to  the  recommendation  from  the  Commission  made  after  consulting  the 
Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Romanian capital and financial markets have recently come under increasing pressure, 
reflecting  the  global  economic  downturn  and  rising  concerns  about  the  health  of  the 
Romanian economy, given its wide external deficit, and the rapidly increasing public 
deficit.  Pressures  on  the  exchange  rate  have  also  increased  and  entail  a  considerable 
risk to the wider banking sector stability. 

In  response,  the  government  and  the  National  Bank  of  Romania  (NBR)  have 
developed  a  comprehensive  strategy  to  firmly  anchor  macroeconomic  policies  and 
reduce financial market stress and outlined this strategy in a letter of intent received by 
the Commission on […]. A cornerstone of the economic programme is the reduction 
of the fiscal deficit from 5.4% of GDP in 2008 to 5.1% of GDP in 2009 and to below 
3%  of  GDP  by  2011.  In  order  to  help  a  sustainable achievement of  lower  budgetary 
deficits,  measures  will  be  taken  to  improve  the  budgetary  strategy  and  process.  This 
economic  programme  and  in  particular  the  fiscal  targets  will  be  reflected  in  the 
Government budget as well as in the convergence programme. 

The  Council  is  reviewing  on  a  regular  basis  the  economic  policies  implemented  by 
Romania, in particular in the context of the annual reviews of Romania's update of the 
convergence programme and implementation of the National Reform Programme and 
the  regular  review  of  progress  made  by  Romania  in  the  context  of  the  Convergence 
Report and of the Annual Progress Report. 

External  financing  is  expected  to  remain  under  significant  pressure  as  the  persistent, 
although declining, current account deficit, together with the need to roll over sizeable 
short-term  and  longer-term  foreign  currency-denominated  debt,  are  likely  not  to  be 
covered  fully  by  FDI  and  other  financial  and  capital  account  inflows  in  2009-2011. 
External financing needs are estimated at around EUR 20 billion in the period until the 
first  quarter  of  2011.  Foreign  banks’  rollover  rate  of  their  exposures  to  Romania  is 
assumed at 100% once the mutual assistance is awarded, consistent with the required 
commitment  of  main  foreign  banks  to  maintain  their  exposure  to  Romania  (as 
confirmed  in  their  joint  statement  of  26  March  2009),  whereas  the  rollover  rate  for 

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corporate external debt to parents and for external debt of Romanian banks is assumed 
at 50% in 2009. For 2010 and 2011, all maturing foreign liabilities are assumed to be 
rolled over at 100% in line with the expected financial market stabilisation and start of 
the recovery in Romania's major export markets. Apart from sufficiently high foreign 
exchange reserve target (of more than 100% of short-term external debt at remaining 
maturity)  conservative  assumptions  were  made  about  other  capital  outflows  such  as 
non-resident  deposit  outflows,  decreases  in  trade  credits  and  portfolio  outflows  in 
order to incorporate additional buffers into the calculations. 

(5) 

(6) 

The Romanian authorities have requested substantial financial assistance from the EU 
and  other  international  financial  institutions  to  support  balance  of  payments 
sustainability and bring international currency reserves to a prudent level. 

There  is  a  serious  threat  to  the  Romanian  balance  of  payments  which  justifies  the 
urgent granting of mutual assistance by the Community.  

HAS ADOPTED THIS DECISION:  

Article 1 

The Community shall grant mutual assistance to Romania.  

This Decision is addressed to the Member States. 

Article 2 

Done at Brussels,  

For the Council 
The President  

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Proposal for a 

COUNCIL DECISION 

Providing Community medium-term financial assistance for Romania 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community,  

Having regard to Council Regulation (EC) No 332/20022 of 18 February 2002 establishing a 
facility providing medium-term financial assistance for Member States' balance of payments 
and in particular Article 3(2), 

Having regard to the proposal from the Commission made after consulting the Economic and 
Financial Committee (EFC), 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

By Decision [….] the Council has decided to grant mutual assistance to Romania. 

Despite  the  expected  improvement  in  the  current  account,  Romania's  external 
financing  needs  in  the  period  until  the  first  quarter  of  2011  are  estimated  by  the 
Commission, IMF and Romanian authorities in March 2009 at EUR 20 billion, as in 
view  of  the  recent  financial  market  developments  the  capital  and  financial  account 
could substantially deteriorate. 

It  is  appropriate  to  provide  Community  support  to  Romania  of  up  to  EUR  5  billion 
under  the  Facility  providing  medium-term  financial  assistance  for  Member  States' 
balance  of  payments  established  by  Regulation  (EC)  No  332/2002.  That  assistance 
should be provided in conjunction with a loan from the International Monetary Fund 
of  SDR  11.40 billion  (around  EUR  12.95  billion)  under  a  Stand-by  arrangement 
expected to be approved on 6 May 2009. The World Bank has also agreed to provide a 
loan to Romania of EUR 1 billion and the EIB and EBRD will provide a total EUR 1 
billion of additional support. 

The  Community  assistance  should  be  managed  by  the  Commission.  The  specific 
economic policy conditions agreed with the authorities of Romania after consultation 
of  the  EFC  should  be  laid  down  in  a  Memorandum  of  Understanding.  The  detailed 
financial terms should be laid down by the Commission in the Loan Agreement. 

The Commission should verify at regular intervals that the economic policy conditions 
attached  to  the  assistance  are  fulfilled  through  missions  and  regular  reporting  by  the 
Romanian authorities.  

2 

OJ L 53, 23.2.2002, p. 1. 

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(6) 

(7) 

(8) 

(9) 

Throughout  the  implementation  of  the  programme,  the  Commission  will  provide 
additional policy advice and technical assistance in specific areas. 

The European Court of Auditors shall have the right to carry out any financial controls 
or audits that it considers necessary in relation to the management of this assistance. 
The  Commission,  including  the  European  Anti-Fraud  Office,  shall  have  the  right  to 
send  its  own  officials  or  duly  authorised  representatives  to  carry  out  technical  or 
financial controls or audits that it considers necessary in relation to the management of 
the Community medium-term financial assistance. 

In  parallel  to  the  policy  conditionality  of  this  programme,  the  Commission  will  also 
continue  monitoring  progress  in  the  area  of  judicial  reform  and  fighting  corruption 
under the Cooperation and Verification Mechanism. The lifetime of this mechanism is 
independent  of  the  duration  of  the  assistance  programme.  In  addition  to  the  policy 
conditionality,  the  Commission  will  also  continue  monitoring  the  correct  use  of  pre-
and  post-accession  EU  transfers,  among  others  through  the  compliance  assessments 
and regular reviews.  

The assistance should be provided with a view to supporting the balance of payments 
sustainability 
the  successful 
this  way,  contributing 
implementation of the Government's economic policy programme, 

in  Romania  and, 

to 

in 

HAS ADOPTED THIS DECISION:  

Article 1 

1. 

2. 

1. 

2. 

3. 

The Community shall make available to Romania a medium-term loan amounting to 
a maximum of EUR 5 billion, with a maximum average maturity of seven years.  

The  Community  financial  assistance  shall  be  made  available  during  three  years 
starting from the first day after the entry into force of this Decision. 

Article 2 

The  assistance  shall  be  managed  by  the  Commission  in  a  manner  consistent  with 
Romania's  undertakings  and  recommendations  by  the  Council,  in  particular  the 
Country  Specific  Recommendations  in  the  context  of  the  implementation  of  the 
National Reform Programme as well as of the convergence programme.  

The  Commission  shall  agree  with  the  authorities  of  Romania,  after  consulting  the 
EFC, the specific economic policy conditions attached to the financial assistance as 
laid down in Article 3(5). Those conditions shall be laid down in a Memorandum of 
Understanding consistent with the undertakings and recommendations referred to in 
paragraph (1). The detailed financial terms shall be laid down by the Commission in 
the Loan Agreement. 

The Commission shall verify at regular intervals in collaboration with the EFC that 
the economic policy conditions attached to the assistance are fulfilled. To this end, 
the Romanian authorities shall place all the necessary information at the disposal of 
the Commission and cooperate in full with the latter. The EFC shall be kept informed 

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4. 

1. 

2. 

3. 

4. 

5. 

by the Commission of possible refinancing of the borrowings or restructuring of the 
financial conditions. 

Romania shall be ready to adopt and implement additional consolidation measures to 
ensure macro-financial stability, in case such measures will be necessary during the 
assistance  programme.  The  Romanian  authorities  shall  consult  the  Commission  in 
advance of the adoption of any such additional measures. 

Article 3 

The Community financial assistance shall be made available by the Commission to 
Romania  in  maximum  five  instalments,  the  size  of  which  will  be  laid  down  in  the 
Memorandum of Understanding.  

The  first  instalment  shall  be  released  subject  to  the  entry  into  force  of  the  Loan 
Agreement and Memorandum of Understanding.  

If  required  in  order  to  finance  the  loan,  the  prudent  use  of  interest  rate  swaps  with 
counterparties of the highest credit quality shall be permitted. 

The  Commission  shall  decide  on  the  release  of  further  instalments  after  having 
obtained the opinion of the EFC.  

The  disbursement  of  each  further  instalment  shall  be  made  on  the  basis  of  a 
satisfactory  implementation  of  the  new  economic  programme  of  the  Romanian 
Government  to  be  included  in  the  Convergence  Programme  of  Romania,  in  the 
National  Reform  Programme  and,  more  particularly,  the  specific  economic  policy 
conditions  laid  down  in  the  Memorandum  of  Understanding.  These  shall  include, 
inter alia,  

(a) 

(b) 

(c) 

(d) 

(e) 

Adoption of a clearly-set medium-term fiscal programme designed to lower by 
2011 the general government deficit to not more than the Treaty reference level 
of 3% of GDP.  

Adoption and execution of an amended budget for 2009 (by the second quarter 
of  2009),  targeting  a  general  government  deficit  of  no  higher  than  5.1%  of 
GDP in ESA 95 terms.  

Reduce  the  public  sector  wage  bill  in  nominal  terms  compared  to  the  2008 
outcome  by  foregoing  public  sector  wage  increases  (totalling  5  percent  in 
nominal terms) scheduled for 2009 (or equivalent further cuts in employment) 
and  by  reducing  public  employment,  including  by  replacing  only  1  of  7 
departing employees.  

Additional  reductions  in  spending  on  goods  and  services  and  in  subsidies  to 
public enterprises. 

Improving the budgetary management by the adoption and implementation of a 
binding  medium-term  fiscal  framework,  establish  limits  on  budget  revisions 
during  the  year,  including  fiscal  rules  and  create  a  fiscal  council  to  provide 
independent and expert scrutiny. 

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(f) 

(g) 

(h) 

(i) 

Reforming  the  public  compensation  system,  including  by  unifying  and 
simplifying the pay scales and reforming the bonus system. 

Reforming  key  parameters  of  the  pension  system  by  moving  towards 
indexation  of  pensions  to  consumer  prices  rather  than  wages,  gradually 
adjusting  retirement  age  beyond  the  currently  agreed  plans,  especially  for 
women,  and  phasing  in  pension  contributions  of  groups  of  public  employees 
currently excluded from such contributions.  

Amending banking and winding-up laws to be able to respond in a timely and 
effective  fashion  in  the  event  of  bank  distress.  A  key  objective  of  the 
amendments will be to strengthen powers of the administrators of banks placed 
under  special  administration.  Beyond  bank  resolution,  the  NBR’s  remedial 
powers  should  be  strengthened  with  provisions  allowing  it  to  request  that 
significant shareholders increase their share capital and financially support the 
bank, and to prohibit or limit profit distributions. Financial supervision will be 
strengthened in line with the relevant EU legislation. In addition, more detailed 
reporting  requirements  on  liquidity  will  be  introduced  and,  at  an  appropriate 
time,  the  regulatory  minimum  level  of  the  capital  adequacy  ratio  should 
increase  from  8  percent  to  10  percent.  Furthermore,  procedures  for  the 
activation  of  deposit  insurance  should  be  modified  to  simplify  and  accelerate 
payouts.  Under  modified  legislation,  deposit  insurance  will  be  activated  upon 
the  NBR’s  determination  within  the  21-day  period.  Finally,  in  order  to 
guarantee sufficient liquidity provision, the NBR is committed to widening the 
range of assets acceptable as collateral. 

in 

the  areas  of 

reform  measures 

Structural 
the  Country  Specific 
Recommendations  issued  in  the  context  of  the  Lisbon  strategy.  These  will 
include measures towards improving the efficiency and effectiveness of public 
administration,  enhancing  the  quality  of  public  expenditure,  sound  use  and 
increased  absorption  of  EU  funds,  reducing  administrative,  fiscal  and  legal 
burdens on business and tackling undeclared work, thereby broadening the tax 
base. 

6. 

7. 

In order to ensure the smooth implementation of the programme conditionality and to 
help  restoring  imbalances  in  a  sustainable  way,  the  Commission  will  provide 
continued advice and guidance on fiscal, financial market and structural reforms.  

Romania  shall  open  a  special  account  with  the  National  Bank  of  Romania  for  the 
management of the Community medium-term financial assistance.  

This Decision is addressed to Romania.  

Article 4 

Article 5 

It shall be published in the Official Journal of the European Union. 

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Done at Brussels,  

For the Council 
The President  

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BUDGETARY IMPACT STATEMENT 

(cf. Article 16 of the Internal Rules)  

POLICY AREA: TITLE 01 – ECONOMIC AND FINANCIAL AFFAIRS 
ACTIVITY: FINANCIAL OPERATIONS AND INSTRUMENTS 
TITLE OF ACTION: EU MEDIUM-TERM FINANCIAL ASSISTANCE FOR 
ROIMANIA 

1. 

NAME  OF  THE  PROPOSAL:  BUDGET  HEADING  CONCERNED  AND 
TITLE 

01  04  01  01  EC  guarantee  for  Community  loans  raised  for  balance-of-payments 
support 

2. 

LEGAL BASIS: 

Art. 119 EC and 308 EC; Council Regulation N° 332/2002 of 18 February 2002.  

3. 

OVERALL FIGURES FOR THE FINANCIAL YEAR (IN EUROS) 

This item constitutes the structure for the guarantee provided by the European Union. 
It will enable the Commission to service the debt (principal, interest and other costs) 
should the debtor (Romania) default.  

The  budget  entry  ("p.m.")  reflecting  the  budget  guarantee  will  be  activated  only  in 
the case of an effective call on the guarantee. It is expected that normally the budget 
guarantee will not be called.  

CA 

3a – Current year 

Not applicable 

Initial  appropriation  for  the 
financial year (budget) 

Transfers 

Additional appropriation  

Total appropriation 

Appropriations  already  set 
aside 
another  work 
by 
programme 

Balance available 

Amount 
proposed 

for 

the  action 

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3b – Carry overs 

Not applicable 

Carry-overs 

Appropriations  already  set 
another  work 
by 
aside 
programme  

Balance available 

Amount for the action 
proposed 

3c – Next financial year 

Not applicable 

Initial appropriation for the 
financial year (budget) 

Transfers 

Additional appropriation 

Total appropriation 

Appropriations  already  set 
aside  by  another  work 
programme 

Balance available 

Amount for the action 
proposed 

CA 

CA 

p.m. 

p.m. 

4. 

DESCRIPTION OF THE ACTION 

to  Romania  consists  of  a 
The  proposed  medium-term  financial  assistance 
Community  loan  (to  be  financed  by  Community  borrowings  in  the  international 
capital markets) in the amount of EUR 5 billion. It will be provided in the context of 
an  international  financing  package,  and  in  particular  by  an  IMF  loan  of  SDR 
11.40 billion  (around  EUR  12.95  billion)  supported  by  the  stand-by  facility.  The 
World Bank has committed a total of EUR 1 billion, and the EIB and the EBRD will 
also  provide  a  total  of  EUR  1  billion.  The  Community  medium-term  financial 
support to Romania is intended to support the balance of payments sustainability of 
Romania which is seriously threatened and thereby also to support the new economic 
programme  of  the  government  aiming,  among  other  things,  at  restoring  investor 

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confidence and alleviating the stress recently experienced in financial markets. At the 
same time, this assistance makes a contribution to financial stability that goes beyond 
the  beneficiary  country  in  view  of  the  important  international  (including  interbank) 
links.  The  new  economic  package  hereby  supported  includes  an  accelerated  deficit 
reduction in the period 2009-2011, which would decrease the government's financing 
need.  Finally,  the  assistance  managed  by  the  Commission  in  consultation  with  the 
Economic and Financial Committee is a way to ensure that the EU remains closely 
involved in the shaping of economic policies in Romania and that those policies are 
consistent with Romania's undertakings in the EU context and recommendations by 
the  Council,  in  particular  as  concerns  the  implementation  of  the  National  Reform 
Programme as well as of the convergence programme.  

On  26  March  2009,  the  parent  institutions  of  the  9  largest  foreign-owned  banks 
incorporated in Romania jointly committed to maintaining their overall exposures to 
Romania  over  the  programme  period,  and  agreed  to  support  their  Romanian 
subsidiaries in order to preserve their current good financial standing throughout the 
period of market turbulences and economic slowdown. Together with the assistance 
provided by the Community, the IMF, the World Bank, the EIB and the EBRD, this 
declaration  underscores  the  broad-based  character  of  support  to  the  Romanian 
authorities.  

The  Community  borrowings  raised  on  the  capital  markets  or  from  financial 
institutions  for  the  purpose  of  extending  the  loan  to  Romania  are  covered  by  the 
Community  guarantee.  The  loan  is  raised  on  the  capital  markets  or  from  financial 
institutions.  The  amount  in  principal  of  loans  which  will  be  granted  to  Romania 
amounts to EUR 5 billion. 

The  structure  for  the  guarantee  provided  by  the  European  Union  will  enable  the 
Commission to service the debt should Romania default. 

In order to honour its obligations, the Commission may draw on its cash resources to 
service  the  debt  provisionally.  In  this  case,  Article  12  of  Council  Regulation  (EC, 
Euratom)  No  1150/2000  of  22  May  2000  implementing  Decision  2000/597/EC, 
Euratom  on  the  system  of  the  Communities’  own  resources  (OJ  L  130,  31.5.2000, 
p. 1) will apply. 

5. 

METHOD OF CALCULATION ADOPTED 

Not applicable. 

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6. 

PAYMENT SCHEDULE (IN EURO) 

Not applicable. 

Heading 

Appropriations 

Payments 

Year n 

Year n+1  Year n+2  Year n+3 

Subsequent 
financial 
years 

Year n 

Year n+1 

Year n 

Year n+1   

Total 

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