As the trade deficit and foreign payments deficit are significantly shrinking, not only due to falling imports, as in 1999, but also growing exports, the risk of a country default, which peaked last year, is diminished. Last year, the debt service was not only disproportionately high compared to overall debt, but Romania had to cope with a fabulous current account deficit with export revenues. The new developments, as well as chances for a new IMF arrangement, give increasingly less credibility to the warnings of international rating agencies that Romania is threatened to default.
But if the intention itself is to make Romania default on its payments, while the menacing predictions become ever less related to tangible reality, another, less orthodox way can be used to induce the default – by leaving the impression that Romania has already faced one. This is the only explanation to the recent mistake – only apparently a mistake because of its unusual character – made recently by the prestigious British weekly The Economist. The paper is cherished as the word of the Bible in the world of international finance, still it did not hesitate to print that Pakistan, Ukraine and Romania have renegotiated their country bonds. And in financial terms, renegotiation means that repayment is put off – something similar to default on payments. There can be no confusion in terms, because Pakistan and Ukraine have already renegotiated their bonds. But it is arcane to see Romania cited along, because not only has Romania done nothing of the sort, but it opposed the multiple and benevolent recommendations to do so. Recommendations that last year came – alas! – from the IMF itself and were very curious because they invited Romania to postpone and not repay on time, rather than pressuring it to honour its financial obligations on schedule.
So it is much more likely that the “mistake” in The Economist echoes the prediction of international rating services and some views in the international financial community that Romania would be better off with a Monetary Council than with the normal currency regime that exists today, featuring a central bank, a monetary policy and an exchange rate. Perhaps, for no other reason than the belief that Romania is unable to tackle its problems – not the priority ones, anyway – and secure low inflation (preferably in the single digits per year) and a stable exchange rate.
In a Monetary Council regime, the national currency is rigidly bound to an international currency. Monetary policy and the institution that enforces it, the central bank, in the Romanian case, the National Bank, are abolished.
With a Monetary Council, concerns over the exchange rate disappear, because the national currency – as much as it remains one – is the international currency (dollar or euro) accepted as reference, and since no currency can be issued, it has a fixed exchange rate against the reference currency. In principle, therefore, inflation in the country equals that of the reference currency, and can be 1-3% a year, as in the USA or Germany.
But the constraints are obvious. And they are terrible. Whoever gets their hands on issued currency, survives, who doesn’t, dies! No one can live beyond his own blanket. If imports are not tightly linked to export revenues, the supply of national currency must be automatically reduced and, also automatically, social and salary spending must go down. Even in nominal terms. The budget cannot borrow even temporarily from the currency issuer and it has to limit severely its spending to effective revenues and its capacity to borrow real money on the market. In fact, this is the point of Monetary Council opponents: that the system can only work in an economy where fiscal and budget discipline is respected. But in a country such as Romania, where tax payments are the first to be dodged, a Monetary Council regime would only deepen this trend, and plainly threaten to block the budget and social security, thus bringing the entire economy to a screeching halt. After all, although theoretically the Monetary Council should rule out the unproductive activities, it does not automatically change the real economy, which, inefficient as it is, obviously cannot become efficient overnight.
The problem is that to enter a Monetary Council regime – which does provide security to business ventures with its predictable prices and exchange rates – a country needs to start off with a certain stash of foreign currency. Which either exists or is supplied from the outside, perhaps as a loan. This amount should be large enough to ensure major economic flows in comparative international terms and to provide for the net average salaries expressed in that particular international currency. Bulgaria has been working under a Monetary Council with a cash stockpile equivalent to $3 billion. Given the size of the Romanian economy, we would need double that amount. But since the average net salary in Romania is barely holding at $90 a month, prudent evaluations show we would need at least $10 billion. An amount Romania does not have and no one abroad is willing to supply – if one is to spend that much money in Romania, they must as well buy the country altogether. To get it to adopt a Monetary Council, Romania must first be pushed from a $90 monthly salary to $25-30, as it happened in Bulgaria. This can only happen after a collapse, economic and financial, as it happened in Bulgaria, where the price bubble and the currency crash drove the net monthly salary from the same $90 to about $30. Therefore, a Monetary Council is not generally introduced willingly or preventively, but after a collapse, because otherwise the cost is too high on those who accept their internationally significant currency to be used as a reference in a country that experiments with the system.
And if no one abroad is willing to put up that much money to have a Monetary Council operating in Romania with its current average salary, an experiment with a Council can only be attempted after Romania will have gone through a collapse.
For now, with the amount of defaults it has avoided and the amount of woes its political class is delivering, Romania is obstinately keeping away from a default on foreign payments. To the despair of some, especially of the international rating agencies, Romania did not default last year and it won’t this year. So far, Romania has gone so little beyond its own blanket that it cannot possibly default. This is not to say the Romanians will be better off! But there is no point in demanding it to further cut, about two or three fold, its already precarious living standard, in exchange for empty hopes of better times later! Better compared to what? In Bulgaria, they say the economy works, that there is even economic growth, but after everything had collapsed. And a lot of people in the West are praising Bulgaria and its progress. Progress against what? Against what used to be collapse, where is Bulgaria today, despite its scant growth? Why, if Romania’s average salary were to crumble from $90 to $25-30, the next year we would readily have economic growth, perhaps better than the 6% the Government had forecast for the years ahead! But would that mean the Romanians would live better than today?