(story to be published in tomorrow’s issue, March 29)
After coming close to the 50% threshold late last summer, interest rates on bank deposits and those offered by the Finance Ministry on treasury bills are again showing signs of going down. In the first three months of the year, for instance, the Finance Ministry has paid increasingly less on bills sold to the populace. While bills sold at the beginning of the year yielded almost 60%, the next issue will carry 55% interest. For money deposited in banks, the year debuted expensively for the Finance Ministry, which paid as much as 72% annual interest. In the meantime, the Treasury’s persistence to attract ever cheaper money from the market seems to have worked: last week, the 50% threshold was crossed. On two occasions, the Finance Ministry sold bills carrying 49% interest. In the first tenders, banks had even overbid and bought one-fifth more than the 400 billion lei the Finance Ministry had offered, but the second tender managed to sell only 200 billion lei worth of bills – and only to the Ministry’s “in-house” banks, sources in the banking industry say. Could this be the signal of an ending trend? Can interest rates go lower than, say, 45% ? It is hard to tell. What is certain is the principle of communicating vessels between lower rates on the currency market and the leu’s devaluation against the US dollar. If interest rates drop too much, the lei on the market find a shelter in hard currency, boosting demand for dollars and inviting devaluation. Inversely, if the dollar drops too much, it becomes unattractive, and placements are reoriented to the money market. This is not happening only on the Romanian market. These principles work everywhere in the world, and the currency market is one of the few markets that “function,” as Prime Minister Isarescu himself said recently. The trouble lies elsewhere, and namely, in the walls of this system of communicating vessels. These walls are the banks’ inability, and sometimes unwillingness, to place their money in the real economy. Banks merely move their money around between dollars and interbanking or Treasury placements. Proof is the Bulletin of the National Bank of Romania, which states that government lending has doubled last year from 20 to 40 trillion lei, while non-government lending has dropped in nominal terms, from 60 trillion to almost 58 trillion lei – down to half in real terms, considering the 54.7% inflation over the entire year. In view of this mechanism, it is very likely that the drop in interest rates so far has been only momentary. Compared to the first half of last year, the Treasury is the only remaining major lender on the market, now that Bancorex is gone and Banca Agricola has restrained its “appetite” for money after it cut its monthly losses to some 90 billion lei. Moreover, the Finance Ministry itself is no longer all that “greedy.” The Treasury’s lobbying to be exonerated of preferential loans to the social insurance budget to cover its chronic deficit has paid off. The Government has decided that the Ministry of Labour and Social Protection should borrow on its own from the money market. It is also possible that official pledges to cover the public debt service this year with privatisation earnings will have a calming effect on the money market. Therefore, the drop in interest rates could be only the effect of a situation used by the Finance Ministry, and the burden on the public debt, which accounts for 45% of all budget expenditures, will weigh in heavily, after all.