This is only a “sample” of the so-called “deleveraging” process that foreign banks and other categories of investors initiated several months ago to reduce exposure considered too risky.
The Romanian central bank had signaled back in May that its greatest fear was that this process might turn brutal and chaotic, and that such a scenario would be very difficult to manage even with a forex reserve of around EUR33 billion.
In May the bulk of money that left the market was “hot money” invested short term, but at the same time banks lost EUR234 million from medium and long-term deposits set up by non-residents.
Traditionally these are deposits opened by foreign banks in local subsidiaries in order to ensure their necessary funding in foreign currency funding. The fact that these amounts have lowered confirms the trend of cutting exposure to the local market.
Compared with the end of last year, deposits of foreign banks in local subsidiaries fell by EUR725 million, increasing pressure on local resources of foreign currency funding.
After the expiry of the Vienna agreement Romania has no direct instrument to keep foreign banks from cutting their exposure. In the first four months of the year the nine foreign banks that had committed in 2009 to keep their money in Romania – Erste Bank, Raiffeisen International, Eurobank EFG, the National Bank of Greece, UniCredit, Societe Generale, Alpha Bank, Volksbank and Piraeus Bank, had already removed EUR2 billion from Romania, according to data from the IMF.
The record-high outflows of foreign capital in May also coincided with the ousting by Parliament of the PDL-backed Ungureanu Government and the installation of the USL government led by Victor Ponta, as well as with a new deepening of the euro zone crisis and an escalation of fears over Greece’s exit from the single currency club.
The leu was quick to respond to these tensions, with the EUR/RON exchange rate leaping 1.5% in one month, from RON4.39 to RON4.46 to the euro.
Apart from stock exchange capital outflows, foreigners sold government securities denominated in lei totaling over RON1 billion, i.e. around EUR238 million. So the share of leu-denominated government securities held by non-residents fell to 9.3% of the existing securities on the market at the end of May.
Although tensions surrounding Greece and the future of the euro zone lessened somewhat in the second half of June, the persistent depreciation of the leu against the euro suggests foreign capital outflows continued. The determining factor has become the instability on the political scene, so the suspension of president Traian Basescu coincided with record depreciations of the Romanian currency to over RON4.5 to the euro.
In May the fight against foreign capital outflows cost the central bank’s forex reserve more than half a billion euros, with overall outflows from the reserve totaling almost EUR2 billion, without including the repayment of the EUR760-million eurobonds issued by Romania ten years ago.
What foreigners can sell faster
While in the first part of the year foreigners’ leu-denominated securities accounted for around 11% of all securities, in May their share fell towards 9%. Apart from securities in lei, foreigners also had securities denominated in euros totaling over EUR800 million in their portfolios, according to data from the Finance Ministry. This is one of the categories of assets that foreigners can get rid of the fastest when they seek to reduce their exposure, and even if the amounts are not impressive, such sales have a visible impact on a forex market where the offer of euros is narrow.
Romania had a stock of short-term external debt of EUR20.8 billion, accounting for over one fifth of the total external debt, and this volatile component can be the source of pressure over the leu’s depreciation, which has deepened lately.
(English version by Daniela Stoican)