Recommendation for a COUNCIL DECISION granting mutual assistance for Romania
Date: 2013-10-10
Institutions: European Commission
Subjects: Romania, balance of payments assistance, budget deficit, budgetary equilibrium, economic convergence, economic reform, financial control, public debt, tax reform













EUR-Lex - 52013PC0709 - EN











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52013PC0709

Recommendation for a COUNCIL DECISION granting mutual assistance for Romania /* COM/2013/0709 final */









EXPLANATORY MEMORANDUM
1. Introduction
After a joint EU-IMF medium-term financial
assistance programme for Romania from spring 2009 to spring 2011, during which
EUR 5 billion were disbursed on the European side and EUR 12.9 bn by the
IMF, the Council of the European Union adopted on 12 May 2011 a decision on a
follow-up precautionary programme, making available EU medium-term financial
assistance of up to EUR 1.4 billion for Romania[1].
In the second programme, which was also a joint EU-IMF programme, no funds were
disbursed either by the EU or by the IMF in line with its precautionary
character.
On 4 July 2013, in the light of remaining risks
to its balance of payments, the Romanian authorities requested a third EU
medium-term financial assistance programme, again jointly with an IMF Stand-By
Arrangement. The EU and IMF assistance is expected to be treated as precautionary,
with no actual disbursements foreseen. On 9 July, the EFC responded
favourably to this request and mandated the Commission to negotiate a new joint
EU-IMF precautionary programme.
From 17 to 31 July 2013, the Commission services
conducted with the IMF staff a joint negotiation mission to Bucharest.
Staff-level agreement on the modalities and contents of a new programme was
reached. A new programme would continue to provide support to the economic
programme of the government aiming, among other things, at consolidating
macroeconomic, fiscal and financial stability, increasing the resilience and
the growth potential of the economy, enhancing administrative capacity,
reforming the tax administration and improving public financial management and
control. A new programme would run for 24 months and would be composed of
precautionary assistance by the European Union of up to EUR 2 billion and by the
IMF of up to SDR 1.75 billion (around EUR 2 billion) supported by a stand-by
arrangement. In addition, the World Bank will continue providing earlier
committed support of EUR 891 million, of which EUR 514 million is still to be
disbursed.
2. Macroeconomic development and outlook
Romania has
registered positive economic growth since 2011. Recent developments suggest
that growth in 2013 will be at about 2%, somewhat stronger than the 1.6% projected
in the Commission's spring forecast. A stellar export performance (mainly on
account of the automotive industry and services) and a good harvest are the
main drivers of growth. These positive trends, however, mask weak domestic demand,
with consumption being flat and investment contracting in the first half of 2013.
Going forward, growth is expected to
gradually strengthen as structural reforms start paying off, EU funds
absorption improves, and exports remain strong as the European economy
recovers. Assuming an average harvest, growth is projected to be slightly above
2% in 2014. Domestic demand is expected to be the main driver of growth, driven
by investment and private consumption, while net exports is projected to have a
small negative contribution, as imports are expected to pick up in 2014 on the
back of strengthening domestic demand.
Inflation, as measured by the HICP, remained
high, at around 6%, in Romania in 2009-2011, but came down in 2012 to an
average of 3.4%. Upward price pressures, however, became stronger again towards
the end of 2012 and in the first half of 2013. Inflation is expected to subside
during the second half of 2013 thanks to a sharp drop in food prices and a
reversal of base effects, and to fall below 3.5% by end-2013, thus within the
central bank's target range (2.5% ±1pp). A further deceleration is expected in 2014.
3. Public
finances
Romania has
successfully consolidated its public finances over recent years, reducing its
budget deficit from 9% of GDP in 2009 to just below 3% in 2012. This
achievement allowed the Council, on 21 June 2013, to abrogate the excessive
deficit procedure for Romania. A new programme would support the government's
further fiscal consolidation efforts which aim to reaching Romania’s medium-term objective (MTO) of a structural budget deficit of 1% of GDP by 2015.
The authorities remain committed to the previous programme's deficit target of
2.4% in ESA terms for 2013. In 2014, further consolidation in line with the
Stability and Growth Pact (SGP) requirements is planned. Based on current
indications, Romania would target a 2% deficit in ESA terms in line with its 2013
update of its convergence programme.
The July negotiation mission agreed on the mid-year
budget rectification allowing for some shifts in revenue and expenditure while
maintaining the overall deficit target for 2013 of 2.3% in cash and 2.4% in ESA
terms. The revised budget caters for lower revenues and lowers domestic capital
investments, reduces provisions for corrections related with EU Funds, and lowers
transfers to other public administration units. Regarding the 2014 budget, the
authorities are looking into ways to increase revenues, mainly via base
broadening. On the expenditure side, one important challenge is the phasing in of
the Unified Wage Law agreed under the first programme.
With the main part of the required fiscal
consolidation having been achieved, the focus of a new programme will be on
improving fiscal governance. It will aim to upgrade the fiscal framework to
bring it in line with Fiscal Compact requirements, along with a number of other
improvements to the content of the Fiscal Strategy and to the transparency of
the budgeting process. It will require improvements in annual and medium-term
capital budgeting, the finalisation of the commitment control system (to
prevent new arrears), as well as improvements in tax administration aimed at
more efficient tax collection.
4. Financial markets and banking sector
developments
Financial market conditions have
significantly improved since the summer of 2012 amid an improvement in global
market sentiment and following the stabilisation of the domestic political
situation towards year-end. It has moved broadly in tandem with the regional
peers, and remained relatively favourable in the first half of 2013. The 5-year
CDS sovereign spreads for Romania dropped from nearly 500 basis points in May
2012 to below 200 bps in early January 2013, and it has hovered slightly above
200 bps since end-June 2013. After substantial losses in May 2012 the BET stock
market index recovered until end-2012; it has been volatile since then but
gained around 10% until early-September 2013.
Notwithstanding the upward trend in
impaired assets (the non-performing loans (NPL) ratio reached 20.3% in June
2013), the banking sector’s capitalisation remained at reassuring levels (the
capital adequacy ratio stood at 14.7% in June). Risks associated with
increasing NPLs have been mitigated by a prudent loan-loss provisioning policy,
although provisions continue to put a strain on profitability (return on equity
reached 6% in H1 2013 after 3 years of losses). The central bank continues to
closely oversee banks with parents from peripheral euro-area countries which
have maintained sufficient capital buffers. The spill-overs from the crisis in
Cyprus were mitigated through the agreement to transfer the local deposit base
of the Romanian branch of Bank of Cyprus to Marfin Bank, the subsidiary of the Laiki
Group, the deleveraging process of foreign banks and the reduction in parent
bank funding (-14.6% since December 2012., albeit in line with regional
developments and overall conducted in an orderly fashion, continue to require
close attention by the supervisor.
5.
Balance of payment and external financing requirements
Romania is expected
to maintain full access to sovereign debt markets over the envisaged programme
period (24 months) barring adverse external developments. CDS spreads have
reached their lowest levels since 2010. The current-account deficit is expected
to decrease from around 4% of GDP in 2012 to around 2% in 2013, mainly thanks
to a decline in trade deficit.
Under the baseline scenario no sovereign or
external financing gap should materialise in the next two years. However, Romania remains vulnerable to exchange-rate volatility and volatile international capital
movements. In an adverse scenario, the financing of the current account could
become difficult and sovereign market access could be impeded. In the latter
case, a first line of defence would be the Treasury’s cash buffer (about
6-month of financing needs) and to a lesser extent the NBR's international
reserves. Should Romania experience protracted and acute financing
difficulties, the precautionary programme could be activated and the funds
available (EUR 2 bn from the EU disbursable in two EUR 1 bn instalments and up
to EUR 2 bn from the IMF Stand-By Arrangement) would allow to cover sovereign
financial and budgetary commitments. A new programme would also provide
reassurance to the financial markets that Romania is committed to an ambitious
economic reform agenda.
6. EU support under the balance-of-payments
facility comes as part of an international effort
In the light of remaining vulnerabilities
and risks to its balance of payments and conditional on the Romanian
authorities' commitment to implement a programme of fiscal, financial and
structural adjustment, the Commission, after having consulted the Economic and
Financial Committee (EFC) on 3 October 2013, recommends the Council to adopt a
Decision granting further mutual assistance to Romania as foreseen by Article
143 of the Treaty (TFEU). The Romanian government shall implement its economic
programme in order to deal with the remaining vulnerabilities, to mitigate
remaining threats to the sustainability of its balance of payments and shall
develop the necessary capacity to design and implement economic policies
without international support.
Furthermore, the Commission, after consulting
the EFC, proposes the Council to adopt a Decision providing precautionary EU
medium-term financial assistance of up to EUR 2 billion to Romania so as to underpin the sustainability of Romania's balance of payments. Activation of the precautionary Union financial assistance
and disbursements may be requested until 30 September 2015.
7. Main contents of a new programme
The new precautionary financial assistance
provides support to the economic programme of the government aiming, inter alia,
at consolidating macroeconomic, fiscal and financial stability, increasing the
resilience and the growth potential of the economy, enhancing administrative
capacity, reforming the tax administration, and improving public financial
management and control. The specific economic policy conditionality will be set
out in a Memorandum of Understanding (MoU) to be concluded by the Commission
with the Romanian authorities. It will preserve the achievements of the
previous two programmes and will carry over the yet unfulfilled conditions from
the second programme.
A: Fiscal consolidation
Following the correction of its excessive
deficit, Romania is expected to reduce its structural budget balance in line
with SGP requirements until it reaches its medium-term objective of a
structural general government deficit of 1% of GDP by 2015, and maintain it
thereafter. Furthermore, the programme will continue efforts to prevent the
build-up of government arrears, both at central and local government level. The
public sector wage bill will need to stay on a sustainable footing, limiting
wage growth as well as public sector employment levels.
B: Fiscal governance and structural
fiscal reform
To firmly anchor fiscal consolidation, the
programme will involve a further strengthening of the fiscal governance
framework. The implementation of the Fiscal Compact is crucial in this respect,
as well as improvements in multi-annual budgetary planning will ensure a more
sustainable fiscal policy.
The government will be supported by
extensive technical assistance provided by the IMF and the World Bank in the
area of public financial management and control. The implementation of a commitment
control system, which will be rolled out in several steps, will help ensure the
reduction and control of arrears. In the health sector, budget control
mechanisms will be strengthened through improved reporting and monitoring
frameworks, in particular with regard to hospitals and pharmaceutical spending
in order to avoid a re-accumulation of payment arrears. Prioritisation of
public investments will be strengthened, to enhance the country's growth
potential.
C: Public debt management
The authorities will take the necessary
steps to improve public debt management with a view to reducing funding cost
and risks and increase average maturity of public debt. 
D: Financial sector regulation and
supervision
In the financial sector, authorities will
continue improving the bank resolution framework and the legislation on the
Deposit Guarantee Fund by amending GO 39/1996 and GEO 99/2006. To speed up the
process of balance sheet cleaning, the National Bank of Romania (NBR) has
clarified the provisions applicable to the write-off of loans with the Romanian
Banking Association and will produce a comprehensive analysis of the asset
quality in the banking sector. In order to further develop the capital market
and diversify the sources of funding for banks, authorities will amend the
covered bonds legislation. Preserving credit discipline and avoiding moral
hazard among debtors contributes significantly to 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.
Authorities will consult extensively with all relevant stakeholders, taking
into account also the impact assessment finalised by the NBR, on the new
provisions on abusive clauses in the law for the application of the civil
procedure code, will ensure that court cases involving abusive clauses are
dealt with by higher ranking courts or by a unique specialised court, and will
take all other necessary measures to ensure a consistent application of these
provisions. To strengthen the supervision of non-bank financial market and
foster consumer protection, authorities will ensure that the legislation on the
integrated non-bank financial regulator, the Financial Supervisory Authority (FSA),
will be amended to comply with international good practices.
E: Structural reforms
The structural reforms aim at improving
market functioning, at increasing resilience to external shocks and at strengthening
  Romania's long-run growth potential. The structural reform agenda of this
programme is a part of the broader agenda set in Romania's National Reform
Programme and covered by the country-specific recommendations addressed to Romania in the context of the European Semester.
The restructuring of state-owned
enterprises (SOEs), including privatisation, will be stepped up in order to
reduce risks to the general government budget from accumulated arrears and
operational losses, while increasing the financial viability of most of these
companies' operations. Authorities will take measures to strengthen corporate
governance of SOEs, including in the financial sector.
In the energy sector outstanding measures
agreed under the two previous programmes will be implemented, among which the
implementation of the roadmaps for the gas and electricity market
liberalisation.
Improvement of the business environment and
facilitating access to finance for the small and medium-size enterprises (SMEs)
is another important pillar of the structural reform agenda of the programme.
The programme aims at reducing administrative burden for the SMEs, facilitating
their access to bank and equity capital, reducing the legal uncertainty by
improving the land and property registration and supporting SMEs when going
abroad. Furthermore, the programme supports the reform of the intellectual
property rights framework, in particular in relation to patents, with the view
to attract foreign direct investment in research and innovation activities.
In the field of labour markets, the
programme supports the completion of the 2010 pension reform by equalising the
pensionable age for men and women. 
In addition to the above described broad
areas of measures to improve the efficiency of public administration in areas
critical to program implementation, the Romanian authorities will be invited to
report every six months to the Economic and Financial Committee (EFC)/Economic
Policy Committee (EPC) on the progress made in this area.
F: Monetary Policy
Monetary policy will remain geared towards
price stability with a view to keeping inflation within the National Bank of Romania’s inflation target band (2.5% ± 1 percentage point).
Recommendation for a
COUNCIL DECISION
granting mutual assistance for Romania
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 143 thereof,
Having regard to the recommendation from
the European Commission made after consulting the Economic and Financial
Committee,
Whereas:
(1)       Romania has implemented a substantial reform programme
since 2009. Under two balance-of-payments (BOP) programmes, Romania has largely corrected its external macroeconomic imbalances and the excessive
deficit procedure was abrogated by the Council on 21 June 2013. Fiscal
consolidation should be continued in line with the Stability and Growth Pact
requirements with a view to meeting the medium-term objective (MTO) in 2015. The
government has regained full access to market-based financing and the exchange
rate has been broadly stable since mid-2009.
(2)       Macroeconomic and
financial stability should be consolidated through the pursuit of prudent
policies. Structural reforms that were initiated under the previous programmes
should be pursued and, where appropriate, reinforced to reduce vulnerabilities
and strengthen the basis for future growth and catching up.
(3)       The Council will review 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.
(4)       While in the baseline
scenario of the economic programme, total gross financing needs until the end
of 2015 are fully covered, and the government continues to have access to
market-based financing, the risks surrounding the baseline scenario support
Romania's request for a financial assistance of a precautionary nature as a
follow on to the assistance granted under Council Decisions 2009/458/EC[2] and 2011/289/EU[3].
(5)       The Romanian authorities
have requested financial assistance from the Union and other international
financial institutions to support balance of payments sustainability and to
ensure that international currency reserves can be kept at a prudent level even
in the case of adverse economic developments.
(6)       Despite improvements in
its current account, Romania remains vulnerable to exchange-rate volatility and
volatile international capital movements. In an adverse scenario marked by a
retrenchment of the current abundant liquidity, situations could arise wherein
the financing costs for Romania would increase and possibly do so in an abrupt
way. Furthermore, adverse developments in the euro-area could cause renewed
pressures on the banking sector. The remaining vulnerabilities justify the
granting of mutual assistance by the Union,
HAS ADOPTED THIS DECISION: 
Sole Article 
The Union shall grant mutual assistance to Romania
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
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, 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. 
3a – Current year
Not applicable
   ||   || CA 
 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 ||   ||   
3b – Carry overs
Not applicable
   ||   || CA 
 Carry-overs ||   ||   
 Appropriations already set aside by another work programme ||   ||   
 Balance available ||   ||   
 Amount for the action proposed ||   ||   
3c – Next financial year
Not applicable
   ||   || CA 
 Initial appropriation for the financial year (budget) ||   || p.m. 
 Transfers ||   ||   
 Additional appropriation ||   ||   
 Total appropriation ||   ||   
 Appropriations already set aside by another work programme ||   ||   
 Balance available ||   ||   
 Amount for the action proposed ||   || 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 or with
financial institutions) in the amount of up to EUR 2 billion. It will be
provided in the context of an international financing package, and in
particular by an IMF loan of SDR 1.75 billion (around EUR 2 billion) supported
by a stand-by arrangement. The World Bank has made EUR 1 billion available
under a Development Policy Loan (DPL) with a deferred drawdown option (DDO). In
addition, the WB will continue providing earlier committed support of EUR 891
million, of which EUR 514 million is still to be disbursed. The precautionary
EU medium-term financial support to Romania is intended to address the remaining
risks surrounding the sustainability of the balance of payments of Romania; even
if the current account deficit has clearly come down, volatile capital flows
imply risks for its financing. The precautionary assistance also continues to
provide support to the economic programme of the government aiming, among other
things, at consolidating macroeconomic, fiscal and financial stability, enhancing
administrative capacity, reforming the tax administration, improving public
financial management and control, and increasing the resilience and the growth
potential of the Romanian economy. Finally, the assistance managed by the
Commission, in consultation with the Economic and Financial Committee, is a way
to encourage economic policies in Romania to be consistent with the country'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 funds 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 after consulting 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
2 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 ||   ||   ||   ||   ||   ||   
   ||   ||   ||   ||   ||   ||   ||   
   || Year n ||   ||   ||   ||   ||   ||   
   || Year n+1 ||   ||   ||   ||   ||   ||   
   ||   ||   ||   ||   ||   ||   ||   
   || Total ||   ||   ||   ||   ||   ||   
[1]               The first programme was covered by Council Decision
2009/459/EC and the second programme by Council Decision 2011/288/EU.
[2]               OJ L 150, 13.6.2009, p. 6.
[3]               OJ L 132, 12.5.2011, p. 28.