The short-term foreign debt, mostly generated by the private sector, is "completely open to growth" and has become a factor that cannot be overlooked by the NBR, even a reason for concern, National Bank Governor Mugur Isarescu says. The short-term foreign debt soared to 13.4 billion euros at the end of 2006, which is more than double the level recorded in December 2005.
Isarescu believes the increase in the short-term debt almost matches the increase in lending in 2006; this phenomenon is one of the effects of the "unorthodox" steps taken to slow down lending by the NBR over the last two years.
The share of the short-term debt in the total foreign debt has risen spectacularly to almost 33% in 2006, from 20% in December 2005 and only 7% in 2000.
The NBR itself estimates that about one third of the short-term debt was generated by the so-called loan export that many banks resorted to, in an attempt to avoid the foreign currency lending cap set in the autumn of 2005, which was removed on January 1, 2007.
"Had we increased the interest rate on RON any further, they would have taken even more loans from abroad," Isarescu says.
At the same time, banks drew short-term lines of credit that reached 6.6 billion euros at the end of last year, which is twice the level of 2005.
What was the result of this expanding phenomenon? The short-term foreign debt service totalled no less than 13.6 billion euros from September 2005 through September 2006, that is more than the volume itself considering the constant rollover of the debts that reach maturity. Therefore the share of such payments in the GDP rose to 15% in September 2006, compared with 1.6% in 2004, given an economic growth of almost 8%. Moreover, the foreign debt service has come to account for 67% of NBR's international reserves (which in turn went up by 27%) compared with a share of 45% of NBR's reserves in 2005. In addition, the current account deficit increased by 45% in 2006, to almost 10 billion euros, that is 10.5% of GDP, higher than forecast by the NBR. Under the circumstances, the exchange rate movements are becoming even more relevant, especially when it comes to short-term debts in foreign currency. The head of the central bank says the pressures on the appreciation of the RON generated by the massive speculative capital inflows "entail risks for the financial stability."
Isarescu also briefly described the mechanisms the private sector could use to achieve overexposure to a foreign currency risk: the appreciation of the RON induces attractive potential for loans in foreign currency, which leads to an increase in the foreign debt of companies, especially in the short term.
"The RON is now deeply enamoured with the foreign market, but we don't know how long this will last. We've obviously kept a watchful eye on the developments on the forex market, over the last few months," the NBR Governor stated. He also notes that the "unorthodox" measures have lost some of their effectiveness.
(Read more in the article titled "Rapid foreign debt growth makes repayment more difficult" below).
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