“The stronger capital flow volatility would negatively affect the cost and volume of external financing necessary to ensure a lasting recovery of the Romanian economy and might put considerable pressure on the leu’s exchange rate,” warns the document, which makes several references to a prospective deleveraging process in the euro zone and to the possibility of reducing exposure to the region.
Direct risks to the trend of the leu exchange rate are also mentioned several times.
The euro on Thursday came very close to the historic high recorded on May 2, reaching RON4.4165 at the official exchange rate calculated by central bank BNR, but on the forex market the exchange rate climbed even above RON4.42/euro, and then fell below this threshold again.
After it had sought foreign investors for years, now Romania is becoming aware how vulnerable it is, considering that eurozone banks control over 80% of the banking system, and many of these banks are going through ample restructuring processes, some risk to be nationalized or simply have other priorities than to maintain financing on the local market.
The risks that the central bank is talking about have already partially materialized through the recent pressures to depreciate the leu and have been at the root of the recent decision of the central bank’s board of directors not to reduce the banks’ minimum reserve requirements, although tension has intensified on the market because of the uneven distribution of liquidity and because of the shortage of financing in euros.
Cristian Popa, deputy governor of the central bank, recently said the 15% minimum reserve requirements ratio on leu-denominated liabilities and the 20% minimum ratio on foreign currency liabilities are two major buffers that in theory can both be altered, but it would be risky to make a short-term cut. Why is that? “You can very well lose those liabilities.”
Popa says the National Bank will move to cutting minimum reserves when international partners agree and when the international situation clears up. “I’m afraid we will have to get used to major fluctuations in investor sentiment.” The Romanian central bank had committed in the preceding letter of intent approved by the board of the International Monetary Fund (IMF) not to cut minimum reserves at least for several months.
The external perception of Romania continued to worsen on Thursday, with CDS levels (the cost of insuring against the risk of default) climbing to 360 basis points, almost 30 points above the level reached a week before.
Similar rises were recorded by Hungary and Croatia’s CDS, with the entire region feeling the new wave of risk aversion on the developed financial markets, with Greece’s fate becoming an extremely hot topic.
Even in the press release of the board of directors after the decision on May 2 to keep the key interest rate at 5.25% a year, the central bank has cited the effects on the region of certain lenders in the EU cutting their exposure.
The situation has changed since last autumn, when central bank deputy governor Cristian Popa said he did not see a risk of foreign banks lowering their exposure to the region because the bulk of the exposure is accounted for by the share capital, which cannot be withdrawn, while subordinated loans account for a much lower share of the available funds than in other countries in the region and anyway they cannot be withdrawn before maturity.
Now the reduction of banking exposure to the region is taken as a fact by the BNR and the central bank warns that this process can amplify the volatility of capital flows if they are doubled by negative domestic developments linked to this year’s election context.
Bank analysts warned as early as last year as to the risks concerning the reduction of external financing to the local market, but the BNR has sought to counter them by asking the shareholders of local banks to consolidate the capitals of local subsidiaries. But parent banks themselves face major capital pressures, each central bank on the markets where these banks operate has its own requirements, so things can be prioritized in such a way that it has negative effects for some countries.
BNR deputy governor Cristian Popa says Romania is in a favorable situation thanks to the high level of the banks’ minimum reserve requirements. “Significant minimum reserve requirements differentiated (on a currency basis) you won’t find in any other country, at least not in the EU. We have a higher degree of freedom because we have more instruments than other countries do.”
However, Popa says the BNR sees no point in cutting reserve requirements, believes macroeconomic stability is good, and that the two buffers (reserve requirements in lei and in foreign currency) are at a comfortable level, at least in the short term.
(English version Daniela Stoican)