Proposal for a COUNCIL DECISION Providing precautionary EU medium-term financial assistance for Romania Proposal for a COUNCIL DECISION Providing precautionary EU medium-term financial assistance for Romania
Date: 2011-04-07
Institutions: European Commission
Subjects: EU financing, EU programme, Romania, balance of payments, budget deficit, financial aid, public finance

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EUROPEAN COMMISSION 

Brussels, 7.4.2011 
COM(2011) 182 final 

2011/0072 (NLE) 

Proposal for a 

COUNCIL DECISION 

Providing precautionary EU medium-term financial assistance for Romania 

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EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION 

On 6 March 2009, against a background of strongly increased risk aversion during the global 
economic  crisis  leading  to  reduced  capital  inflows,  pressures  on  the  exchange  rate  and  an 
increasingly  restricted  access  to  the  bond  market  for  public  borrowing,  the  Romanian 
authorities made a request for EU medium-term financial assistance and also approached the 
International  Monetary  Fund  (IMF)  and  the  World  Bank  for  additional  complementary 
assistance.  On  9  March  2009,  the  European  Commission  (Commission)  together  with  the 
Council  Presidency  declared  that  the  EU  was  ready  to  participate  with  the  IMF  in  a 
coordinated  financing  package  to  underpin  the  sustainability  of  Romania's  balance  of 
payments. However, it was stressed that the financial assistance would be contingent upon the 
implementation  of  a  supportive  policy  programme.  This  programme,  sent  in  the  form  of  a 
Letter  of  Intent  to  the  EC  and  the  IMF  on  28  April  2009,  had  its  focus  on  cushioning  the 
effects  of  the  sharp  drop  in  private  capital  inflows  while  implementing  policy  measures  to 
address the external and fiscal imbalances and strengthening the financial sector. Against the 
background  of  the  coordinated  financing  package  underpinned  by  this  programme,  in  the 
context  of  the  European  Bank  Coordination  Initiative,  the  parent  institutions  of  the  nine 
largest  foreign-owned  banks  incorporated  in  Romania  committed  to  maintain  their  overall 
exposure to Romania at a high level. On 6 May 2009, in conjunction with an IMF Stand-by 
Agreement (SBA) in the amount of SDR 11.4 billion approved on 4 May 2009 and additional 
support  from  the  World  Bank,  EIB  and  EBRD  of  up  to  EUR  2  billion,  the  Council  of  the 
European Union decided to grant mutual assistance for Romania and to provide EU medium-
term  financial  assistance  of  up  to  EUR  5  billion  for  Romania.1  On  23  June  2009,  a 
Memorandum  of  Understanding  (MoU)  between  the  European  Union  and  Romania  was 
concluded,  specifying  the  concrete  policy  measures  to  be  implemented  over  the  programme 
period and ahead of each disbursement of the five instalments of the EU loan.  

Between October 2009 and February 2011, Commission services carried out review missions 
to assess progress regarding conditions attached to the EU medium-term financial assistance. 
Based  on  the  findings  of  these  missions,  the  Commission  concluded  that  the  conditions  for 
disbursement of the five instalments of the EU loan had been broadly fulfilled. Between the 
first and the fifth instalment, a total of four addendums were joined to the MoU, reflecting the 
effects  of  changes  in  the  economic  environment  as  well  as  additional  structural  reform 
measures.  

On  17  February  2011,  after  comprehensive  discussions  with  Commission  services  and  IMF 
staff  during  a  mission  from  25  January  to  8  February  2011  in  Bucharest,  the  Romanian 
authorities  made  a  request  for  precautionary  EU  medium-term  financial  assistance  of  up  to 
EUR  1.4  billion  that  would  continue  to  support  the  government's  economic  reform 
programme.  Similarly  to  the  previous  one,  the  new  assistance  would  be  provided  in 

1 

Council Decision of 6 May 2009 granting mutual assistance for Romania (2009/458/EC) (OJ L 1150, 
13.6.2009) and Council Decision of the same date providing EU medium-term financial assistance for 
Romania (2009/459/EC) (OJ L 150, 13.6.2011, p. 8). On 16 February 2010, the Council amended this 
Decision  to  address  the  impact  on  programme  targets  of  the  larger  than  expected  recession 
(2010/183/EU) (OJ L 83, 30.3.2010, p. 19). 

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conjunction  with  an IMF SBA in  the  amount of  SDR  3.09  billion  that  Romania  would  also 
treat  as  precautionary,  and  loans  from  the  World  Bank.  Thereby,  the  jointly  provided 
precautionary  assistance  would  appropriately  address  the  remaining  serious  threats  to 
Romania's balance of payments and the related risks for economic and financial stability for 
Romania and its main trading partners in the EU.  

2. 

MACROECONOMIC DEVELOPMENT AND OUTLOOK 

Following a fall of 7.1% in GDP and a further 1.3% fall in 2010, positive signs pointing to a 
pickup in sentiment and activity accumulate. Latest survey data confirm the improving trend 
in economic sentiment. Industrial production recovered by 5.5% in 2010. Likewise, industrial 
new  orders  in  the  second  half  of  2010  increased  by  around  25%  y-o-y  on  average.  Exports 
continued  to  grow  healthily  (by  27.3%  in  2010  in  RON  value  terms).  While  construction 
activity  recovered  strongly  in  December  2010,  retail  trade  is  still  feeling  the  effects  of  the 
VAT  hike  and  the  reduction  in  public  sector  wages.  Modest  wage  growth  (the  average  net 
monthly salary in December rose by 1.3% y-o-y) signals improvements in the labour market 
and will provide support to consumption. While registered unemployment continued to fall in 
January  2011,  the  unemployment  rate  is  likely  to  increase  in  the  first  half  of  the  year, 
reflecting the impact of new registration obligations for unemployed. 

The  economy  is  expected  to  turn  around  in  2011,  with  real  GDP  forecasted  to  increase  by 
1.5%.  After  falling  severely  in  2009  and  2010,  corporate  investment  should  pick  up  as 
external demand is growing and capacity utilisation rates in the manufacturing sector are close 
to their historical highs of 2008. Strong exports and the jump in industrial orders are expected 
to  reassure  companies  to  invest  even  if  risk  spreads  remain  somewhat  elevated.  Residential 
construction  will  likely  remain  subdued  as  credit  activity  remains  low  and  house  prices  are 
projected to stabilise further. After having declined considerably in 2009 and 2010, household 
consumption is expected to pick up slowly this year, supported by an upward adjustment in 
wages  in  the  public  sector  (+15%,  after  the  25%  cut  in  July  2010),  as  well  as  in  industry, 
where activity has recovered strongly. A stronger rebound is impeded by the continuing fiscal 
retrenchment, the high debt-service-to-income ratio, and limited increase in household credit 
due to a high ratio of NPLs in retail banking. Real economic growth in 2012 is forecasted to 
be  around  4%.  Growth  is  expected  to  gradually  become  more  broad-based,  with  domestic 
demand  playing  a  decisive  role  in  uplifting  the  economy.  Private  consumption  expenditure 
will likely increase at a faster pace due to improvements in household balance sheets, driven 
by further increases in wages and employment.  

Inflation peaked in December 2010 at 8.0% (y-o-y) on the back of significant hikes in indirect 
taxation. This was well-above the 3.5% ±1 percentage point inflation target set for end-2010 
by  the  National  Bank  of  Romania  (NBR).  In  the  first  half  of  2010,  inflation  was  primarily 
kept  up  by  increases  in  tobacco  excise  duties  and  higher  fuel  prices  –  annual  inflation 
averaged  4.5%,  while  HICP  inflation  at  constant  taxes  hovered  at  just  around  2%.  Inflation 
increased  to  7.5%  in  the  third  quarter  on  the  back  of  the  VAT  hike  and  increases  in  food 
prices.  In  the  second  half  of  2011,  inflation  is  expected  to  gradually  return  –  as  the  price 
effects related to indirect tax hikes taper off – to the NBR's target band (3.0% ± 1 percentage 
point).  

The NBR has kept the key rate stable since May 2010. Nonetheless, abundant liquidity at the 
interbank market kept short-term rates at much lower levels than the NBR's key policy rate in 
recent months. Despite the decline in money market rates, credit growth to the private sector 

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remains stubbornly weak on the back of unfavourable cyclical conditions and tightened bank 
lending  standards.  Monetary  policy  continues  to  face  difficult  challenges,  notably  repeated 
overshooting of the inflation targets. The NBR's cautious approach to monetary easing in the 
second half of 2010 was warranted because of possible second-round effects from the VAT-
related  spike  in  inflation.  In  order  to  better  anchor  inflation  expectations,  the  NBR  will 
continue with active communication policy.  

3. 

PUBLIC FINANCES 

The 2010 budget deficit was 6.5% of GDP in cash terms, better then the 6.8% of GDP deficit 
target. Revenue increased by 7.2% in 2010, reflecting extra income from the increase in the 
VAT rate to 24%, as well as from excise taxes and non-tax revenue which grew by 28.2%. In 
contrast, profit tax revenue fell by 17.4% in 2010 as a result of the lagged effect of the crisis. 
In  addition,  social  security  contributions  and  the  income  tax  also  fell  by  4.5%  and  3.2% 
respectively. Nominal expenditure grew by 4.2% in 2010 due to increases in other transfers, 
social  assistance  and  goods  and  services.  The  latter  is  partly  explained  by  the  repayment  of 
arrears in the health sector of RON 2 billion in September. The main expenditure cuts were in 
capital spending which decreased by 11.7% in 2010, followed by personnel spending which 
fell by 8.6% and subsidies which were 6.7% lower.  

Commission staff projects that Romania has also met the ESA deficit target for 2010, but this 
needs  to  be  confirmed  in  the  next  months.  It  should,  however,  be  noted  that  the 
reclassification  of  a  number  of  SOEs  into  the  general  government  sector  by  Eurostat  in 
September  2010  and  April  2011  would  have  a  deficit-increasing  impact  of  at  least  0.5%  of 
GDP  until  the  relevant  SOE  deficits  have  been  eliminated.  Depending  on  budgetary 
performance in 2011, this may necessitate an adjustment in the deficit target for 2011 to take 
this  development  into  account.  Additional  efforts  on  this  account  might  then  be  needed  to 
ensure that a deficit below  3% of  GDP in ESA terms will  be achieved in  2012  in line with 
applicable Council Recommendations under the Excessive Deficit Procedure. 

Domestic  payment  arrears  were  reduced  by  end  2010  and  the  authorities  committed  to 
keeping them down throughout 2011. The stock of domestic payment arrears (older then 90 
days)  stood  at  RON  1.1  billion  (0.2%  of  GDP)  at  end  2010,  down  from  RON  1.6  billion 
(0.3% of GDP) at end 2009. The arrears are predominantly at local government level (around 
84%  of  the  total  stock  of  arrears  at  end  2010),  and  to  a  lesser  extent  in  the  health  sector, 
including hospitals. While local government arrears are more difficult to control, a new law 
with  effect  from  1  January  2011  on  local  government  finances  should  help.  Following 
payments of health-sector arrears of RON 2 billion (0.4% of GDP) in September 2010, health-
sector arrears have been kept down except for hospitals. 

Further health sector reform will be key to prevent a re-emergence of arrears in this area on a 
durable  basis.  The  objective  is  to  have  an  efficient  health  system  that  functions  within  its 
budgetary allocations. The measures that are being and will be taken include the introduction 
of  a  means  tested  co-payment  system,  the  elimination  of  mandatory  contracting  with  all 
hospitals  by  the  Health  Fund,  and  the  reform  of  the  package  of  benefits  insured  by  the 
government to exclude coverage of non essential health services. The World Bank is, and will 
be, providing technical assistance on these matters. Furthermore, the Ministry of Finance will 
monitor the aggregate figures for hospital budgets in order to ensure that they are consistent 
with  the  programmed  expenditure  of  the  general  government.  If  this  is  not  the  case,  then  it 

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will take action together with the Health Ministry to prevent a re-accumulation of arrears at 
hospital level. 

The authorities remain committed to reaching a 4.4% of GDP budget deficit in 2011 in cash 
terms (below 5% of GDP in ESA terms). They have adopted and enacted the 2011 budget, as 
well  as  the  Medium-Term  Budgetary  Strategy  for  2011-13.  On  the  revenue  side,  all  major 
taxes  will  remain  unchanged  so  as  to  ensure  predictability.  On  the  expenditure  side,  the 
budget  keeps  the  wage  bill  capped  at  RON  39  billion,  excluding  the  social  security 
contributions for the military (RON 1.6 billion) which will be paid by the State starting from 
this  year  as  a  result  of  the  new  pension  law.  Following  a  temporary  emergency  25%  cut  in 
public wages in mid-2010 to bring the budget deficit back on track, public wages have been 
increased by 15% compared to their December 2010 level. However, this increase was offset 
by  the  elimination  of  the  13th  salary  and  of  the  holiday  bonus.  Furthermore  the  number  of 
employees  in  the  public  sector  was  reduced  by  an  extra  20000  compared  to  what  was 
necessary to fit into the overall wage bill. Other measures included in the 2011 budget consist 
of  maintaining  a  freeze  in  pensions,  continuing  reductions  in  public  employment  with  the 
policy  of  replacing  only  1  of  7  departing  workers,  and  eliminating  heating  subsidies. 
Moreover,  the  reform  of  the  pension  system,  together  with  the  unified  wage  law  and  the 
restructuring of the health sector, should generate significant savings.  

For 2012 the authorities remain committed to reducing their deficit below 3% of GDP in ESA 
terms,  but  additional  measures  will  be  needed.  The  Commission's  autumn  2010  economic 
forecast based on a no-policy change assumption already indicated the need for an additional 
effort of 0.5% of GDP. However, even more important measures may be necessary due to the 
reclassification  of  loss-making  SOEs  into  the  general  government  sector,  bringing  the  total 
additional adjustment effort probably to around 1% of GDP. Continued expenditure restraint, 
including on wages and bonuses will also have to be observed. 

The  proposed  precautionary  programme  will  also  aim  to  further  strengthen  the  budget 
management system. The implementation of the Fiscal Responsibility Law and the adoption 
of  the  Medium-Term  Fiscal  Strategy  should  help  improve  the  budget  planning  process. 
Furthermore,  the  budgeting  of  capital  expenditure  requires  strengthening  at  the  central 
government level. Even though Romania's public capital spending budgets tend to be sizeable 
(for 2011 7.2% of GDP is reserved), there is very little output to show for it, suggesting that 
capital  spending  has  been  rather  inefficient.  Moreover,  a  very  large  number  of  investment 
projects  were  started  in  previous  years  without  ensuring  the  necessary  resources  for  their 
completion. As a result, the resources currently available for capital spending are spread out 
thinly over a (too) large set of unfinished projects. A working group under the Prime Minister 
will establish a list of priority investment projects for which financing will be available over 
the next 3-5 years within the envelope defined in the updated fiscal strategy for 2011-2014. In 
addition, the monitoring and evaluation of investment projects at the central government level 
will be improved by strengthening the public investment monitoring unit in the MoPF and by 
improving  the  database  on  capital  investment  managed  by  the  Ministry.  Possible  technical 
assistance from EU Member States may also be required. The MoPF will produce quarterly 
reports to the government on the status of ongoing and planned investment projects and the 
government  will  discuss  this  report  and  take  measures  to  eliminate  any  potential  fiscal 
slippages  or  other  problems  related  to  budget  execution.  Finally,  capital  spending  will  be 
gradually  reoriented  from  entirely  domestically  financed  investment  to  EU  co-financed 
investment, which should also contribute to improve the absorption of EU funds.  

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4. 

FINANCIAL MARKETS 

Romanian  financial  markets  showed  a  solid  performance  since  mid-2010,  although  the 
situation remains fragile. The continued turbulences in the euro-area periphery appear to have 
had  little  direct  impact  on  Romanian  markets.  Financial  stress  eased  in  tandem  with  an 
upswing  in  global  market  sentiment  and,  to  some  extent,  the  anticipation  of  the  EU/IMF 
follow-up programme for Romania. The exchange rate was stable and remained close to RON 
4.20-4.30/EUR in recent months. After peaking at just above 400 basis points by mid-2010, 
CDS spreads on sovereign debt hovered at around 300 basis points since October 2010 (lower 
than  in  Greece,  Ireland,  Portugal  and  Hungary).  The  stock  market  index  BET  remained 
broadly  flat  in  the  fourth  quarter  2010,  but  picked  up  again  in  January.  Yields  on  domestic 
one-year  T-bill  auctions  eased  well  below  7%  p.a.  in  January  and  February  2011,  implying 
lower  refinancing  costs  for  the  budget  than  in  most  of  2010.  Banking  sector  profitability 
suffered due to asset quality deterioration. Non-performing loans (NPLs) increased to 11.9% 
by end 2010 compared to 7.9% at end 2009. Given these trends in impaired assets, banking 
sector profitability suffered culminating in a net loss by year end (i.e. the return on equity was 
negative at -1%). However, banks have maintained sufficient capital buffers, with the capital 
adequacy ratio for the system remaining above 14%. In spite of the reduction in the exposure 
commitment to 95% of the March 2009 benchmark level as of October 2010, the parent banks 
involved  in  the  European  Bank  Co-ordination  "Vienna"  Initiative  have  maintained  their 
exposure close to the March 2009 level (98% as of end January 2011).  

5. 

BALANCE OF PAYMENT AND EXTERNAL FINANCING REQUIREMENTS  

The  current  account  balance  posted  at  a  deficit  of  4.2%  of  GDP  in  2010.  Private  capital 
inflows  have  gradually  increased.  This  has  allowed  a  faster-than-expected  accumulation  of 
foreign exchange reserves which are now at comfortable levels (at around 130% of short-term 
debt).  On  current  projections  under  the  macro-economic  baseline  scenario,  external  debt 
sustainability would not be at stake over the programme horizon. 

In case of a negative shock, Romania might need additional financing of up to EUR 5 billion. 
In such an alternative adverse scenario, Romania would not be able to fully cover its external 
financing needs from available funding resources, largely due to decreased inflows of foreign 
direct  investment  and  lower  roll-over  rates  for  amortising  debt,  notably  from  banks.  In  this 
alternative set-up, the residual financing needs would have to be covered from activating the 
precautionary  EU  financial  assistance  (in  conjunction  with  the  IMF  assistance).  The 
alternative  scenario  has  been  developed  in  close  co-operation  with  IMF  staff  and  underpins 
the  additional  financing  needs  of  around  EUR  5  billion  to  be  covered  from  international 
financial assistance. 

While  the  economic  crisis  has  helped  to  reverse  the  accumulation  of  imbalances  in  the 
economy,  the  imbalances  still  exist.  The  current  account  has  been  reduced  from  11.4%  of 
GDP in 2008 to around 4.2% in 2010. Credit growth has stalled and construction activity fell 
by double digit rates in the past two years. Inflation remains high. However, the sharp fall in 
wages,  especially  those  in  the  public  sector,  and  the  further  depreciation  of  the  currency  in 
2010,  have  helped  Romania  gain  price  competitiveness.  The  measures  adopted  by  the 
authorities  have  been  successful  in  reducing  the  fiscal  deficit  below  the  agreed  target  for 
2010.  However,  the  current  account  and  the  government  deficit  (twin  deficits)  are  still 
relatively high. Moreover, the continuous increase in foreign borrowing may pose a risk. This 

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means  that  harmful  macro  imbalances  still  exist,  seriously  threatening  the  sustainability  of 
Romania's balance of payments.  

6. 

EU SUPPORT UNDER THE BALANCE OF PAYMENTS FACILITY COMES AS PART OF AN 
INTERNATIONAL EFFORT 

In  the  light  of  the  still  elevated  risk  to  encounter  balance  of  payments  difficulties  and 
conditional on the Romanian authorities' firm commitment to implement a major programme 
of  fiscal,  financial  and  structural  adjustment,  the  Commission,  after  having  consulted  the 
Economic and Financial Committee (EFC) on 3 March 2011, recommends to the Council to 
adopt a Decision as to continue the granting of mutual assistance foreseen by Article 143 of 
the Treaty (TFEU). The Romanian government shall implement its economic programme in 
order to address the remaining serious threats to the sustainability of its balance of payments.  

Furthermore, the Commission, after consultation of the EFC, proposes to the Council to adopt 
a  Decision  providing  precautionary  EU  medium-term  financial  assistance  of  up  to  EUR  1.4 
billion  for  Romania  to  underpin  the  sustainability  of  Romania's  balance  of  payments.2  The 
proposed precautionary assistance would be available for activation until 31 March 2013. 

A  precautionary  medium-term  financial  assistance  for  Romania  under  the  balance  of 
payments  facility  for  Member  States  appears  to  be  appropriate  under  the  current 
circumstances  of  still  reduced  capital  inflows  and  remaining  elevated  fiscal  and  external 
imbalances.  While  under  present  market  conditions  Romania  does  not  intend  to  request  a 
disbursement  of  funds  made  available  from  either  the  IMF  or  the  EU,  the  precautionary 
assistance will facilitate a continued orderly adjustment of the fiscal and the external deficits.  

The  assistance  will  strengthen  the  credibility  of  the  government's  economic  programme, 
including  the  continued  fiscal  adjustment,  the consolidation  of  financial  market  reform,  and 
an increased focus on product and labour market reforms and the increased absorption of EU 
structural  funds.  The  implementation  of  the  economic  programme  will  enhance  Romania's 
growth potential which should positively impact on the external value of Romania's currency 
RON and thereby reduce the likelihood of negative balance sheet effects in the corporate and 
household  sectors.  In  turn,  the  economic  recovery  should  be  more  sustainable  and  asset 
quality  in  the  banking  sector  should  improve,  which  again  frees  up  resources  for  new 
investment.  

Whereas  the  precautionary  assistance  reflects  the  fact  that  under  normal  market  conditions, 
Romania can cover  its financing  needs without further official assistance, the  negative risks 
up to the first quarter of 2013, seriously threatening the sustainability of Romania's balance of 
payments, are considered to be adequately addressed by the envisaged total of up to EUR 5 
billion in precautionary loans, as the proposed precautionary EU assistance for Romania of up 
to  EUR  1.4  billion  would  come  in  conjunction  with  IMF  support  through  a  precautionary 
Stand-by-Arrangement  (SBA)  in  the  amount  of  SDR  3.09  billion  (300%  of  Romania's  IMF 
quota;  about  EUR  3.6  billion).  The  World  Bank  will  continue  providing  earlier  committed 
support  of  EUR  400  million  under  its  development  loan  programme  (DPL3)  and  EUR  750 
million under results based financing for social assistance and health reforms.  

2 

The proposed assistance would be provided under the EU facility for Member States which have not yet 
adopted the euro, as governed by Council Regulation (EC) No 332/2002. 

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The  precautionary  EU  financial  assistance  is  provided  in  support  of  the  continued  strong 
commitment  by  the  Romanian  authorities  to  implement  a  comprehensive  economic 
programme.  The  programme  will  be  fully  reflected  in  an  update  of  the  Romanian 
Convergence  Programme  as  well  as  in  Romania's  National  Reform  Programme  (NRP).  The 
specific economic policy conditionality attached to the disbursement of instalments under the 
EU  loan  will  be  set  out  in  a  MoU  to  be  concluded  by  the  Commission  with  the  Romanian 
authorities; the principal elements of this conditionality are the following:  

A: Fiscal consolidation 

Fiscal  consolidation  remains  a  crucial  element  in  the  reform  programme  which  foresees  a 
reduction of the fiscal deficit to 4.4% of GDP deficit for 2011 on a cash basis (below 5% of 
GDP in ESA terms) and to below 3% of GDP deficit for 2012 in ESA terms, thereby putting 
an  end  to  the  excessive  deficit.  Furthermore,  the  programme  will  step  up  efforts  to  reduce 
government  payment  arrears,  both  at  central  government  and  local  government  levels.  The 
financial  reporting  system  of  those  state-owned  enterprises  (SOEs)  that  are,  or  risk  being, 
classified  within  general  government  needs  to  be  enhanced  in  order  to  allow  a  monthly 
monitoring of their financial situation, including the stock of payments arrears, with a view to 
gradually reduce the latter. The public sector wage bill will remain capped at RON 39 billion 
(excluding 1574 million RON in social security contributions for the military as a result of the 
application of the new pension law) in 2011 and will need to respect the relevant limits set in 
the Medium-Term Fiscal Strategy over the 2012-2014 period. 

B: Fiscal governance and structural fiscal reform 

Fiscal  governance  will  strongly  benefit  from  the  ongoing  Technical  Assistance  provided  by 
the IMF and the World Bank in the area of Public Financial Management and Control. This 
also includes training of staff and the refurbishing of the entire IT infrastructure in the central 
government's budget and expenditure management. The economic programme caters for the 
fact  that  public  investment  needs  to  be  better  prioritized  and  the  planning,  monitoring  and 
evaluation  of  public  investment  projects  have  to  be  improved.  The  economic  programme 
contains several measures to this end, including the creation of a project database, increased 
capital investment planning and monitoring capacity in the Office of the Prime Minister and 
in  the  Ministry  of  Finance,  respectively.  Hospital  budgets  under  the  subordination  of  the 
Ministry of Health will be closely monitored by the Ministry of Finance in order to avoid a re-
accumulation  of  payment  arrears.  The  Romanian  authorities  will  continue  to  review  and 
update the debt management strategy on an annual basis, i.e. under this programme by end-
December 2011 and end-December 2012. 

C: Financial sector regulation and supervision 

In the financial sector, authorities will ensure that the prudential treatment of debt-for-equity 
swaps will not lead to a weakening of the financial positions of credit institutions. To prepare 
the introduction of IFRS as of 2012, authorities will develop proposals for prudential filters 
aiming  at  preserving  the  prudent  approach  to  loan-loss  provisioning,  solvency  and  reserves. 
Preserving  credit  discipline  and  avoiding  moral  hazard  among  debtors  contributes 
significantly  towards  enhancing  financial  stability.  Therefore,  the  government  will  continue 
refraining  from  adopting  legislative  initiatives  (such  as  the  personal  insolvency  law)  and 
promoting  provisions  in  the  debt  collection  law,  which  would  undermine  credit  discipline. 
Moreover, authorities will make the necessary amendments to correlate the provisions of the 

EN 

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law on the bankruptcy of insurance undertakings with the general law on insolvency and the 
law on insurance business and insurance supervision. 

D: Monetary Policy 

Monetary  policy  will  remain  geared  towards  price  stability  and  the  achievement  of  the 
National  Bank  of  Romania’s  inflation  targets  (3.0%  ±  1  percentage  point  at  end-2011  and 
end-2012).  

E: Structural reforms 

The  economic  programme  of  the  Romanian  Government  has  a  strong  focus  on  product  and 
labour  market  reform  with  a  view  to  improve  the  functioning  of  these  markets  and  thereby 
make  the  Romanian  economy  more  resilient  when  faced  with  external  shocks  and  to 
strengthen its long-run growth potential. The structural reform agenda of this program shall be 
included  in  Romania's  forthcoming  National  Reform  Programme  and  will  help  Romania 
achieve its national goals set out in the framework of the Europe 2020 growth strategy. 

In  the  energy  sector,  the  programme  foresees  the  deregulation  of  the  price-setting  and  the 
trade  with  electricity  and  gas  with  the  aim  to  increase  market  access  and  transport  capacity 
and to contribute to build a fully functioning, integrated and interconnected internal market in 
electricity and gas as recalled by the European Council of 4 February 2011. The programme 
foresees the creation of a strong and independent energy regulator, able to fulfil its tasks and 
responsibilities  as  defined  in  the  third  energy  package.  The  restructuring  plan  for  the  coal 
sector will be notified to the Commission. The programme contains a comprehensive reform 
of  the  railway  sector  aiming  at  increased  efficiency  for  the  provision  of  passenger  transport 
services  and  the  planning  of  railway  infrastructure,  while  making  the  sector  more  attractive 
for non-passenger transport (cargo). The reform will be helped by a strong and independent 
regulatory body for the railway sector. 

The Romanian legal framework on public-private partnerships needs to be reviewed in order 
to  ensure  full  compliance  with  EU  public  procurement  Directives.  Further,  a  review  of  the 
public  procurement  environment  shall  be  completed.  The  programme  foresees 
the 
establishment  of  an  operational  Point  of  Single Contact  (PSC),  provided  for  in  the  Services 
Directive, to help businesses with all administrative procedures involved for the establishment 
in  Romania  or  for  the  cross-border  service  provision  and  will  remove  restrictions  for  the 
setting up of retail shops. 

The  programme  continues  the  reform  of  the  labour  market  through  the  amendment  of  the 
Labour Code expected to be approved in 2011, and streamlining wage setting institutions. The 
labour market rigidity shall be addressed through a wider use of fixed-term labour contracts, 
through  the  reduction  in  the  generosity  of  compensation  for  overtime,  and  extending  the 
probationary  period  of  permanent  contracts.  The  Romanian  Government  will  seek  with  the 
relevant  stakeholders  how  to  rationalise  wage  bargaining  in  the  private  sector.  Finally,  the 
policy  programme  contains  measures  to  increase  labour  supply  incentives  while  reducing 
undeclared  labour.  The  reforms  shall  be  in  compliance  with  EU  Directives  and  core  labour 
standards and shall take due account of the need to have an integrated approach to flexicurity. 

Authorities  will  take  measures  to  strengthen  corporate  governance  of  State  Owned 
Enterprises, including in the financial sector. 

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On  the  much  needed  increase  in  the  absorption  of  EU  funds,  the  programme  foresees  the 
implementation  of  the  Government's  Action  Plan  which  is  currently  being  finalized  by  the 
Romanian  authorities  in  reply  to  the  letter  by  the  President  of  the  Commission  of  13 
December  2010.  The  programme  sets  specific  targets  for  the  cumulative  aggregate  level  of 
certified  expenditures  until  the  end  of  2012,  including  the  insurance  that  adequate  national 
resources  for  co-financing  are  being  secured  in  the  annual  budgets  in  order  to  avoid  the 
situation where Romania loses a substantial part of the structural funds made available for its 
economic development. 

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2011/0072 (NLE) 

Proposal for a 

COUNCIL DECISION 

Providing precautionary EU medium-term financial assistance for Romania 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union,  

Having regard to Council Regulation (EC) No 332/20023 of 18 February 2002 establishing a 
facility providing medium-term financial assistance for Member States' balances 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) 

By  Decision  2011/xxx/EU,  the  Council  has  decided  to  continue  to  grant  mutual 
assistance to Romania. 

A  precautionary  medium-term  financial  assistance  for  Romania  under  the  balance  of 
payments  facility  for  Member  States  appears  to  be  appropriate  under  the  current 
circumstances  of  still  reduced  capital  inflows  and  remaining  elevated  fiscal  and 
external imbalances. While under present market conditions Romania does not intend 
to  request  the  disbursement  of  any  instalment,  the  precautionary  assistance  will 
facilitate  a  continued  orderly  adjustment  of  the  fiscal  and  the  external  deficits  by 
strengthening  credibility  of  the  government's  economic  programme,  including  the 
continued  fiscal  adjustment,  the  consolidation  of  financial  market  reform,  and  an 
increased focus on product and labour market reforms and the increased absorption of 
EU  structural  funds.  These  measures  should  enhance  Romania's  growth  potential, 
underpin monetary and financial stability, as well as confidence in Romania's currency 
(RON),  and  reduce  the  likelihood  of  negative  balance  sheet  effects  in  the  corporate 
and household sectors.  

(3) 

If  negative  risks  attached  to  the  current  baseline  scenario  of  the  Government's 
economic  programme  materialize,  Romania  would  not  be  able  to  cover  its  external 
financing needs from available funding resources, largely due to decreased inflows of 
foreign direct investment and lower roll-over rates for  amortising debt, notably  from 
banks. In such a stress scenario, the residual financing needs would have to be covered 

3 

OJ L 53, 23.2.2002, p. 1. 

EN 

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(4) 

(5) 

(6) 

from activating the precautionary EU financial assistance. The stress scenario has been 
developed in close collaboration with IMF staff and underpins the additional financing 
needs of around EUR 5 billion to be covered from international financial assistance. 

It  is  appropriate  to  provide  EU  support  to  Romania  of  up  to  EUR  1.4  billion  on  a 
precautionary basis under the facility providing EU medium-term financial assistance 
for Member States' balance of payments established in by Council Regulation (EC) No 
332/2002.  This  assistance  should  be  provided  in  conjunction  with  financial  support 
from the International Monetary Fund of SDR 3.09 billion (around EUR  3.6 billion) 
under  a  precautionary  Stand-by  arrangement  approved  on  [21]  March  2011.  The 
World  Bank  will  continue  support  of  EUR  400  million  committed  earlier  under  its 
development  loan  programme  (DPL3)  and  will  provide  up  to  EUR  750  million  of 
results based financing for social assistance and health reforms. 

The assistance should be managed by the European Commission who will agree with 
the  authorities  of  Romania,  after  consulting  the  EFC,  the  specific  economic  policy 
conditions attached to the precautionary financial assistance. Those conditions should 
be laid down in a Memorandum of Understanding.  

In  view  of  the  precautionary  nature  of  the  assistance,  Romania  will  not  request  the 
disbursement of any instalment under the EU loan, unless Romania is in difficulty as 
regards  its  balance  of  current  payments  or  capital  movements.  In  the  case  Romania 
makes  a  request  for  funding  to  the  Commission,  the  latter  will  decide,  after  having 
consulted the EFC, on the activation of the programme and on the amount and timing 
for  making  available  any  such  instalment.  The  detailed  financial  terms  related  to 
possible disbursements will be laid down in a Framework Loan Agreement. 

(7) 

The precautionary financial assistance shall be provided with a view to contributing to 
the successful implementation of the Government's economic policy programme, and, 
in this way, shall support the sustainability of Romania's balance of payments, 

HAS ADOPTED THIS DECISION: 

1. 

2. 

1. 

Article 1 

The European Union shall make available to Romania a precautionary medium-term 
financial assistance amounting to a maximum of EUR 1.4 billion. In case the facility 
is activated and disbursements are provided, the assistance shall be provided in the 
form of a loan with a maximum average maturity of 7 years.  

The  precautionary  EU  financial  assistance  shall  be  available  for  activation,  and 
disbursements may be requested, until 31 March 2013.  

Article 2 

The  assistance  will  be  managed  by  the  Commission  in  a  manner  consistent  with 
Romania's undertakings and the recommendations by the Council, in particular in the 
context of the implementation of the National Reform Programme as well as of the 
annual update of Romania's Convergence Programme.  

EN 

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2. 

3. 

1. 

2. 

3. 

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

Article 3 

The activation of the precautionary EU financial assistance shall be examined by the 
Commission,  following  a  written  request  by  Romania  to  the  Commission.  The 
Commission,  after  consulting  the  EFC,  shall  decide  if  the  activation  of  the 
programme  and  the  subsequent  request  for  disbursements  under  the  assistance  is 
justified, and shall decide on the amount and timing of such disbursements. In case 
the  financial  assistance  is  being  activated,  the  funds  may  be  made  available  in  not 
more than three instalments, the amount and timing of which shall be laid down in an 
addendum to the MoU. Each instalment may be disbursed in one or more tranches. 

Upon an activation of the assistance, any disbursement of the loan, or parts thereof, 
shall  be  subject  to  the  entry  into  force  of  the  addendum  to  the  MoU  referred  to  in 
paragraph  1.  The  Commission  shall  decide  on  the  disbursement  of  the  EU  loan,  or 
parts thereof, after having obtained the opinion of the EFC. 

Any disbursement shall be made on the basis of a satisfactory implementation of the 
economic  programme  of  the  Romanian  Government  to  be  included  in  both  the 
Convergence  Programme  and  the  National  Reform  Programme;  more  particularly, 
the  specific  economic  policy  conditions  laid  down  in  the  MoU,  shall  include,  inter 
alia,  

(a) 

(b) 

(c) 

the  adoption  of  budgets  and  the  implementation  of  policies  in  line  with  clear 
fiscal  targets  for  the  fiscal  years  2011  to  2013  that  underpin  the  continued 
fiscal consolidation with a view to stabilize the government debt to GDP ratio 
and  put  an  end 
the  Council 
Recommendations under the excessive deficit procedure, 

the  excessive  deficit 

line  with 

in 

to 

the  requirement  to  attain  progressively  more  restrictive  benchmarks  for  the 
reduction in government payment arrears both at central government and local 
government levels, 

the  introduction  of  an  enhanced  reporting  system  for  the  state-owned 
enterprises  which  are  already  part  of  the  ESA  definition  of  the  general 
government,  and  also  for  those  which  will  likely  be  re-classified  into  the 
general  government  sector  by  Eurostat  in  2011  and  2012,  with  a  view  to 
enabling the government to assess on a  continuous basis the likely impact on 
the  general  government  deficit  and  the  evolution  of  arrears,  subsidies  and 
transfers, and losses linked to these enterprises, 

EN 

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(d) 

(e) 

(f) 

(g) 

(h) 

(i) 

(j) 

the continued monitoring of the public sector wage bill such that it respects the 
relevant limits set in the Medium-Term Fiscal Strategy, 

the introduction of a means-tested co-payment system for medical services, as 
well as an adequate system of checks and controls against the accumulation of 
arrears in the health system,  

the  implementation  of  measures  to  improve  the  management  of  the  public 
investment budget in line with the fiscal strategy 2012-14 and with a focus on 
shifting  from  entirely  domestically  financed  investment  to  EU  co-financed 
investment, 

the review, update and publication of a multi-annual debt management strategy 
on an annual basis, 

the implementation of policy measures aimed at rationalising the wage setting 
system with a view to allow wage developments to better reflect productivity 
and  reforms  increasing  the  flexibility  of  labour  contracts  and  working  time 
arrangements within an integrated flexicurity approach, 

the adoption of measures aiming at improving the market functioning in energy 
and transport, in line, where applicable, with EU legislation, 

the  implementation  of  measures  to  facilitate  the  business  environment  in 
services  in  line  with  the  service  Directive  2006/123/EC  of  the  European 
Parliament and of the Council of 12 December 2006 on services in the internal 
market4, 

(k)  measures to further strengthen the prudential framework for credit institutions 

and to prepare the introduction of IFRS as of 2012, 

(l) 

(m) 

legislatives amendments to ensure the mutual consistency between the law on 
the  winding-up  of  insurance  undertakings,  the  general  law  on  insolvency  and 
the law on insurance business and insurance supervision. 

to  improve  the  absorption  of  EU  Structural  and  Cohesion  Funds  and  specific 
targets  to  be  met  for  the  cumulative  aggregate  level  of  certified  expenditure 
under these funds. 

4. 

If  required  in  order  to  finance  the  loan,  the  prudent  use  of  interest  rate  swaps  with 
counterparties  of  highest  credit  quality  shall  be  permitted.  The  EFC  shall  be  kept 
informed  by  the  Commission  of  possible  refinancing  of  the  borrowings  or 
restructuring of the financial conditions. 

This Decision is addressed to Romania. 

Article 4 

4 

OJ L 376, 27.12.2006, p. 36. 

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This Decision shall take effect on the day of its notification. 

Article 5 

Article 6 

This Decision shall be published in the Official Journal of the European Union. 

Done at Brussels, [date]. 

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 

1. 

NAME OF THE PROPOSAL, BUDGET LINE CONCERNED AND TITLE 

Proposal for a Council Decision providing precautionary EU medium-term financial 
assistance  for  Romania  in  conjunction  with  the  Recommendation  for  a  Council 
Decision granting mutual assistance for Romania. 

01 04 01 01 European Union guarantee for EU loans raised for balance-of-payments 
support. 

2. 

LEGAL BASIS: 

Art. 143 TFEU, Art. 352 TFEU, Council Regulation N° 332/2002.  

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  by  another  work 
programme 

Balance available 

EN 

16 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount  for  the  action 
proposed 

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 

The  proposed  precautionary  EU  medium-term  financial  assistance  to  Romania,  if 
activated,  consists  of  an  EU  loan  (to  be  financed  by  EU  borrowings  in  the 
international  capital  markets)  in  the  amount  of  up  to  EUR  1.4  billion.  It  will  be 
provided in the context of an international financing package, and in particular by an 
IMF  loan  of  SDR  3.09  billion  (around  EUR  3.6  billion)  supported  by  the  stand-by 
facility.  The  World  Bank  has  committed  a  total  of  EUR  1.15 billion,  EUR  400 

EN 

17 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
million  of  which  had  already  been  committed  under  the  preceding  international 
financing  package.  The  precautionary  EU  medium-term  financial  support  to 
Romania  is  intended  to  address  the  still  elevated  risks  attached  to  the  balance  of 
payments sustainability of Romania which has been seriously threatened since 2009. 
The  precautionary  assistance  also  continues  to  provide  support  to  the  economic 
programme of the government aiming, among other things, at consolidating regained 
investor  confidence  and  to  decrease  the  likelihood  of  further  peaks  of  stress  in 
financial markets. The newly provided precautionary assistance is expected to make 
a contribution to financial stability that goes beyond the beneficiary country in view 
of  the  important  international  (including  interbank)  links.  The  government's 
economic  package  hereby  supported  includes  a  continued  deficit  reduction  in  the 
period  2011-2013,  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.  

The EU borrowings raised on the capital markets or from financial institutions for the 
purpose  of  extending  the  loan  to  Romania,  in  case  of  a  request  by  Romania  and  a 
positive evaluation of such a request by the Commission and the EFC, are covered by 
the  EU  guarantee.  The  loan  is  raised  on  the  capital  markets  or  from  financial 
institutions.  The  amount  in  principal  of  loans  which  could  be  granted  to  Romania 
would amount to up to EUR 1.4 billion. 

The  structure  for  the  guarantee  provided  by  the  EU  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  2007/436/EC, 
Euratom  on  the  system  of  the  European  Communities'  own  resources  (OJ  L  130, 
31.5.2000, p. 1) will apply. 

5. 

METHOD OF CALCULATION ADOPTED 

Not applicable. 

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 

EN 

18 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year n 

Year n+1   

Total 

EN 

19 

   EN