Interest spending to finance the budget deficit and to refinance the public debt will this year leap 32% against 2010, climbing by no less than RON6 billion.
The government’s significant financing needs caused the public debt to leap by RON19,6 billion in the first half of the year, i.e. a rise by around RON3 billion per month. The debt increased by 10% in the first six months of this year, to RON214 billion, with the ratio of the debt to GDP approaching 40%.
In the last three years, interest spending almost tripled, according to Finance Ministry data, climbing from RON3.6 billion in 2008, to this year’s budgeted amount of RON9.5 billion.
“Interest spending reached almost 2% of the GDP. It is not a lot when compared against other countries, but for Romania, it is significant. Considering that we are talking about a lower budget, the burden of interests on the public debt is more significant. The essential constraint for the fiscal policy over the next few years is that of financing. It is very important to stabilize the public debt below 40% of the GDP, to keep it from rising so fast,” commented Ionut Dumitru, president of the Fiscal Council and chief-economist of Raiffeisen Bank.
An acceleration of the growth rate of interest spending can be noticed in 2011, after last year they rose by nearly 20%. The amounts spent from the budget on interests reached RON6.06 billion in the first eight months of this year, up 24.5% against the similar period of last year.
The rise of this spending is influenced both by the level of yields (actual interests paid) and by the calculation basis – the volume of the debt – which keeps growing.
Euro zone problems also affect Romania in terms of the cost of financing.
The deepening of tensions on external markets has also been felt in Bucharest. On the interbank money market, there has been a tendency towards an increase of interest rates and the pressure has been felt by the Finance Ministry, with the yields paid being on the rise.
This fall, the Treasury rejected several auctions for the sale of government bonds or attracted lower amounts than scheduled because it deemed borrowing costs too high.
At the latest auction, on Monday, the Finance Ministry sold 11-month bonds, paying 6.82%.
The Finance Ministry is trying to fight pressure from banks to increase yields, although some analysts have said on several occasions that a prospective temporary saving can turn into a higher long-term cost.
The budget deficit falling below 3% of the GDP over the next two years and a resumption of economic growth could see the public debt stabilize at 35-37% of GDP, according to Ionut Dumitru. But if the economy faces new recession risks in 2012 and deficit reduction becomes even more difficult, this time frame could widen significantly.
The equation is made more complicated by next year’s parliamentary elections, with Romania having a history of slippages under similar circumstances.
Financing needs are high and will stay high over the next few years.
(English version by Daniela Stoican)