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Government loans in Euros only postpone an inevitable austerity and make it more painful

Călin Rechea (Translated by Cosmin Ghidoveanu)
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Government loans in Euros only postpone an inevitable austerity and make it more painful
Călin Rechea (Translated by Cosmin Ghidoveanu)

Not even the Wizard of Oz could solve the issue of government revenues and expenses

The government has borrowed a record amount from the international markets, 3.3 billion Euros, in its attempt to keep its promise that there won't be austerity.

In fairy tales it is enough to want something for it to come true, in some cases after clicking the heels of your ruby shoes together three times, but the issue of government revenues and expenses cannot be solved that way.

Someone always has to generate revenues to cover the costs, regardless of the ways in which "concealing" the hiding of the true beneficiaries is "attempted".

And foreign currency loans are one of the riskiest ways cover the budget deficit.

A press release of the Ministry of Finance (MFP) of January 2020 stressed that the 3 billion Euros made back then had the lowest costs. Unfortunately, one factor that wasn't mentioned at all was the exchange rate risk, which is increasingly higher in Romania's case, and which can cancel out any benefit of the lower interest rates for the loan denominated in Euros.

News in the financial media show that the interest rates for the 3.3 billion Euros loan were higher than those of January 2020. Furthermore, the two bonds issues, which raised 1.3 billion, and 2 billion, respectively, have lower maturities, of 5 and 10 years, compared to the previous issues.

Why has the currency risk increased? Because the national currency is under high depreciation pressures, amid the significant increase of macroeconomic imbalances, especially the budget deficit and that of the current account.

Institute of International Finance (IIF) recently warned that financing of the budget deficit for emerging economies will be increasingly difficult in the coming period, and one of the consequences can only be an explosive increase in the pressure towards the devaluation of their national currencies.

Under these circumstances, the discrepancy between the dynamic of the GDP and of the public debt has increased over the last few years, amid the persistence of irresponsible budget deficits, despite the large economic growth.

The latest data from the Ministry of Finance (MFP) show a public debt of 478.84 billion lei in March 2020, after an increase of almost 30 billion over the end of last year. The public debt, defined according to the national methodology, which includes the guarantees issued by the local and central authorities, has increased by about 48 billion in 2019. Under these circumstances, the debt to GDP ratio has risen to 44.2%, up from 42.4% in 2019.

None of the above stopped finance minister Florin Cîţu from declaring that pension and wage cuts won't happen and there will be no austerity in the budget sector.

Will they then be "diluted" by inflation? How else can the austerity be avoided, when the scale of the disaster that the coronavirus pandemic has left behind in the private sector? Who will provide the budget revenues for the payment of the wages in the public sector or for investments?

Austerity is defined in the Romanian Explicative Dictionary as "sobriety, severity, harshness, rigidity (when it comes to principles, behavior or life)", and when it comes to describing people it also means "moderation".

No matter how much the political authorities, not just in Romania, try to create a "rosy" picture for the electorate, the economic reality cannot be misled.

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Curs valutar BNR

18 Sep. 2020
Euro (EUR)Euro4.8582
Dolar SUA (USD)Dolar SUA4.0972
Franc elveţian (CHF)Franc elveţian4.5132
Liră sterlină (GBP)Liră sterlină5.3220
Gram de aur (XAU)Gram de aur257.4245

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