Romania's international lenders extended a €20 billion bailout programme today, reassuring investors spooked by the country's deep recession, though it may face tougher compliance hurdles in future.
The head of an International Monetary Fund mission to the country, Jeffrey Franks, said no major policy changes were needed after its latest review of Romania, which has slashed public spending including wages and raised value added tax to comply with the terms of the deal.
"We were impressed by the diligence Romanian authorities proved in their decision to act in a difficult social, economic and political environment," Franks said.
"Those measures were painful, but they will yield results soon by consolidating public finances ... and increasing (market) confidence."
Romania's economy contracted more than 7 per cent last year and is still mired in recession and dependent on the bailout deal, which pools aid from the IMF, European Union and World Bank.
"This is a positive message for the financial markets," said Ionut Dumitru, chief economist at Raiffeisen Bank in Bucharest.
"Probably Romania will need a new accord with the Fund after this one expires - not necessarily a financing one but one to monitor macroeconomic progress."
The leu currency and stocks plunged when the bailout deal was put on hold in June pending spending cuts and tax hikes.
The currency and blue-chip stocks both edged some 0.2 per cent lower on today's news, which was widely expected.
Bucharest is struggling to shrink its fiscal gap and needs IMF backing to maintain investor confidence as it seeks to persuade borrowers to accept lower returns on its sovereign debt, effectively setting a 7 per cent ceiling on shorter term paper.
The dangers of crossing swords with the IMF were also shown by neighbouring Hungary, where asset prices were dented last month when the government broke off talks with its international lenders and rejected budget austerity.
EU and IMF officials estimated Romania's economy would contract by about 1.9 per cent this year as austerity measures hit spending but gross domestic product would then grow 1.5-2 per cent in 2011.
Reuters