Prime Minister Isarescu met on Wednesday with representatives of the Finance Ministry and the National Bank of Romania to establish a policy to make bank deposits in lei more attractive than hard currency ones, as the Government spokesperson announced.
In other words, a meeting of “financial-banking officials,” as the spokesperson put it, called to decide how to make the leu stronger than the dollar.
The meeting involved some calculations, too: interest on lei would be in excess of 3% a month, or 43-44% a year, and the leu’s depreciation would be kept sensibly below this. Too bad there was no directive issued with all this!
Hence, stories about the market economy are probably good for the working folk. But at the top of the pyramid, “officials” are still looking for levers to raise or lower interest rates to trim various macroeconomic indicators – meagre decimals added to economic growth or subtracted from inflation.
But there is a good reason why the Government and “responsible officials” are catering so carefully to the leu.
Since a large portion on the deficit is financed with foreign money, the Finance Ministry was able to afford not to borrow anything from banks and even dictate conditions, pushing interest rates on government bonds from 70% earlier this year to 40% this summer.
Accustomed to make money by merely channelling people’s cash into government bonds, banks have constantly lowered their rates to 30-33%, below monthly inflation, which in July, for instance, was 4.2%, or an annualised 70%.
Rates on loans have not been falling at the same rate, and a 25-30% spread opened up between passive rates (paid on deposits) and active rates (on loans), an absolutely uncommon occurrence in a normal economy, even as a ratio between this spread and the passive rate.
Therefore, instead of being secure in the bank, people’s money is blown away by the wind of inflation.
The situation has grown completely atypical. There is plenty of money on the market, overnight rates on the inter-bank market hit as much as 20%, but the money is still too expensive for investors, whether natural or legal persons.
For instance, a variable 45-50% car loan rate is still prohibitive, as in two or three years’ time the amount will practically double.
The Government’s initiative thus fits banks’ interests like a glove, as banks have nothing to do with their money. The circulation of money: bank deposits – government bonds potentially issued to patch up holes in banks, will not be disturbed, just as the banks-government pact has not been disturbed so far.
The disturbance that is manifest today is only apparent. As soon as the Finance Ministry raises rates on government bonds by 5-10 percent, banks will be happy to be able to live on the difference between rates on people’s deposits, which would still cover the inflation rate.
As in any system, this one also converges to a state of equilibrium. Unfortunately, this balance will not do any good to the real economy, which is not absorbing any more loans.
Investments in the first six months have grown insignificantly over last year, when already they made up a slim share of GDP. Plus, the growth relied entirely on exports, as consumer spending dipped 0.5%.
Meetings like this, whatever the purpose, are unlikely to have any tangible effect. The market has and will go ahead of any indications from above, and authorities will only trim here and there, to keep the cart going and screeching along, as it has successfully been doing so far.