The effects of the international financial crisis also have spread on the Romanian economy. In terms of the direct impact, the banking system was less affected by not being exposed to the toxic assets, and because of prudential and administrative measures adopted over the time by the National Bank of Romania. Indirectly, the international financial crisis is expanding on the Romanian economy on the multiple channels.The evolution of the financial crisis will lead economies into a deflationary spiral in the next year or even a longer lasting, as deficit reduction efforts will take large, and probably we shall assist an output of some euro area of weaker states.financial crisis effects; economic policy; measures on economic growth; external financial agreement; the euro area; Greece

NĂFTĂNĂILĂ, Cristina Alina

English

Research Papers in Economics

85
FINANCIAL CRISIS AND ROMANIA’S ECONOMY
Cristina Alina NĂFTĂNĂILĂ, Assistant lecturer Ph.D. student
Faculty of Accounting and Finance Câmpulung 
Spiru Haret University
Abstract
The effects of the international financial crisis also have spread on the
Romanian economy.
 In terms of the direct impact, the banking system was less affected by 
not  being  exposed  to  the  toxic  assets,  and  because  of  prudential  and 
administrative  measures  adopted  over  the  time  by  the  National  Bank  of 
Romania. Indirectly, the international financial crisis is expanding on the 
Romanian economy on the multiple channels.
The  evolution  of  the  financial  crisis  will  lead  economies  into  a 
deflationary  spiral  in  the  next  year  or  even  a  longer  lasting,  as  deficit 
reduction efforts will take large, and probably we shall assist an output of 
some euro area of weaker states.
Key-words: financial  crisis effects,  economic  policy,  measures  on 
economic growth, external financial agreement, the euro area, Greece
JEL Classification: G28
Introduction
This article sheds light on issues of financial crisis on the Romanian economy 
and challenges for the economy in Romania. 
We  conciedered  necessary  the  analysis  of  the  issues  related  to  the 
revitalization  of  the  economy  of  our  country  (out  of  recession,  budgetary 
correction, high  dependence  on foreign loans) and   also the presentation  of the 
measures taken by the Government in the Government Programme 2009-2012. 
What do we need? In essence, it is necessary a significant strengthening of 
the fiscal and salary policies. In addition to this, the government can help improve 
the perception of the foreign investors through measures such as improving the 
capacity of absorbing EU funds and thus replacing the private external financing 
with the public  external  financing  or by creating  new  jobs  in the  insufficiently 
exploited areas, which can gradually  take over the role of engine of the economic 
growth.
Literature review
According  to  economic  speciality  literature  (Fischer  1999),  the  financial 
crisis is a phenomenon which is  in the spotlight of worldwide  economists as a 86
result of the impact on their economies. Specialists of every country try to find 
solutions for overcoming the economic crisis by adopting an optimal combination 
of all policies: budgetary, salary, monetary in order  to move the business towards 
work and productivity.
Even  if  the  ongoing  economic  adjustment  process  cannot  be  accurately 
planned, however, the promotion of the coherent and credible economic policies 
could avoid a disorderly adjustment (hard landing).
Theoretical background
For this article we have studied the speciality literature, articles and studies 
recently published on this topic.
 In our research we have examined the components of gross domestic product 
to  show  that,  in  Romania,  economic  growth  in  2009  remained  in  the  positive 
territory. For this we have consulted the national and international macroeconomic 
context,  the  Government  Programme  2009-2012  and  the  official  site  of  the 
National Bank of Romania.
Intern and international macroeconomic context in 2009-2010
The  effects  of  the international  financial  crisis  have  also  spread  on  the 
Romanian economy.
However, in terms of the direct impact, the banking system was less affected 
by  not  being  exposed  to  the  toxic  assets,  and  because  of  prudential  and 
administrative  measures  adopted  in  time  by  the  National  Bank  of  Romania. 
Indirectly,  however,  the  international  financial  crisis  and  especially  its  obvious 
consequence – the recession in the developed countries – are expanding on the 
Romanian economy on multiple channels.
On the commercial the channel, slows or even reduces the export growth. On 
the financial channel, limites the access to the external financing, and thus restrict, 
the volume of lending, and creates difficulties in the private external debt service.
On the exchange rate channel, reducing the external financing reflected in the 
national currency depreciation.
On the confidence channel, there  was a  withdrawal  of investors from the 
Eastern  Europe  countries.  This  as the  effect  the  manifestation  on  the  monetary 
currency market of some moments of panic and speculative attacks, such as the one 
in October 2009 in Romania, which made necessary the intervention of NBR, the 
central bank.
Finally, on the channel of wealth and balance sheet effects, the damage of the 
net assets of people and the companies occurs, due to the high proportion of loans 
in the foreign currency (related to the national currency depreciation) and the drop 
of the asset prices and capital values at unsustainable values (the propagation of 
these effects determines that the degree of  uncertainty regarding the evolution of 
the economic variables be extremely high).
This  contributes,  in  its  turn,  to  the accentuation  of  the  crisis  through  the 
negative effects it has on the expectations and by increasing the degree of cautious 
consumers and traders.87
In Romania, the response to the adverse effects of the crisis cannot be similar 
to that made by some European countries or the U.S. There are several differences 
between the Romanian economy and these economies, which do not allow copying 
the package of measures developed there.
In essence, we  talk about the fact that the Romanian economy has a large 
current account deficit, which indicates its dependence on the external financing. 
We have to chose between the orderly reductions of this deficit or its reduction by 
the market in the current conditions of tension and chose mistrust, with dramatic 
consequences for the exchange rate and the economic growth.
Even  if  the  ongoing  economic  adjustment  process  cannot  be  accurately 
planned, however, the promotion of the coherent and credible economic policies
could avoid a disorderly adjustment (hard landing). Thus, the government should 
avoid an emotional crisis approach under the unions and employers pressure, which 
should  lead to same  measures to stimulate the  intern  demand, complicating the 
reduction of the current account deficit at a sustainable level. Only a concentration 
of the macroeconomic policies combination on the process of the adjusting external 
imbalances (the current account deficit) and of  the internal one (the budget deficit) 
may lead to the support of the soft landing of the economy and to improving the 
perception of the foreign investors.
What do we need? In essence, it is required a significant strengthening of the 
fiscal and salary policies (in the broad sense, including bonuses and awards of the 
quasi-wage nature). In this sense, the 2009 budget was an approvable first step, 
especially because of the relatively high allocation of funds for investment.
In addition to this, the government can also help improve the perception of 
the foreign investors through measures such as improving the capacity of absorbing 
EU funds and thus replacing the private external financing with the public external 
financing  or  by  creating  new  jobs  in  the  insufficiently  exploited  areas 
(infrastructure, tourism, agribusiness), which can take over gradually the role of the 
engine of the economic growth.
Generally, financing agreements with the international organizations, starting 
with the European Commission and the European Investment Bank are needed, in 
order  to  compensate  for  the  reduction  of  sensitive  private  capital  inflows  are 
welcome.
As for the National Bank of Romania it remains consequent in its economic 
growth projection for 2010, with the following arguments:
- lower  share  of  exports  in  GDP  compared  to  other  Central  and  East 
European countries, which still have projected a positive growth in 2010;
- the low level of the financial intermediation (nongovernmental credit as a 
share of GDP), which implies a smaller contraction  of the  economy  due to the 
financial channel;
- the  exchange-rate  flexibility,  which  allows  some  exogenous  shocks  to 
dissipate over the nominal variables (exchange rate), rather than to affect the real 
economy.88
Another set of arguments for maintaining the economic growth in the positive 
territory is based on the analysis of GDP components (consumption, investment 
and the net exports):
- as for as the consumption is regarded, in the 2
nd trimester of 2010 it is 
highlighted an increase of the final consumption with 0,4% compared to the 1
st
trimester  of  the  same  year,  mainly  as  a result  of  the  increase  in  the  expences 
volume for the final consumption of the population (+ 0,8%);
- a negative effect on the GDP had the evolution of the net export as a result 
of the accentuate glowth of the imported goods and services (+ 24,5%) compared 
to the exports’ volume (21,4%);
- direct  net  investment  show  an  increase  of  1.773  mil.  Euros  in  the  2
nd
trimester, compared to the first trimester of 2010, when their value reached only 
839 mil. Euros.
In the first of 2010, the  net  GDP’s  decline  continued, but  its annual rate 
reached –2,6%, as compared to – 6,5% in the last trimester of 2009. In the second 
trimester  of    2010,  the  gross  GDP  increased  by  0,3%  according  to  the  datas 
extracted from the CEB’s annuel buletine published in september.
It is  expected that at the same time  with the resumption  of the  economic 
growth, the private sector will record the deficits again. In order for Romania’s 
current account deficit to remain within sustainable limits it is necessary to restrict 
the budget deficit below the 7.3% of GDP, the entire year.
The  government  promises  to  reduce  the  budgetary  deficite  from  6,8%  of 
GDP in 2010 to 4,4% of GDP in 2011, to 3% in 2012, and 2,5% in 2013.
In  early  of  2009,  the  completing  of  a  multilateral  external  financial 
agreement with the International Monetary Fund, the European Union, the World 
Bank  and  other  international  financial  institutions  took  place  in  the  following 
context:
• a high volatility of the financial markets, characterized by an increased risk 
of  the  investment  abandon  and  withdrawal  of  the  foreign  investors’  capital, 
especially from the emerging economies;
• combining the effect of the international financial crisis with the following 
specific macroeconomic imbalances of the Romanian economy:
– share of high current account deficit in GDP (7.3% in 2009) and funding in 
an increasing proportion of it by accumulating short-term external debt;
–  accumulation  of  short-term  debt,  mostly  private,  which  has  fuelled 
unsustainable growth rates for increasing the nongovernment credit and the risk of 
inability of the debt rolling at the moment of amplifying the international crisis and 
reducing the liquidity on the international level.
From the perspective of the Romanian authorities, the motivations of such an 
agreement have been and remain the following:
• limiting the impact, of otherwise greater than originally anticipated, of the 
international crisis over the Romanian economy. Thus, were avoided adjustments 
that could become unsupported by the population and the economic agencies;89
•  improving  the  prospects  for  development  of  Romanian  economy, 
sustainability  and  coherence  in  the  public  policies  through  the  commitment  to 
implement  some  reforms  in  the  areas  agreed  with  the  international  financial 
institutions in a given time frame;
• access with  relatively low cost to funds for replacing any major reduction 
in the capital flows towards the Romanian economy.
The agreement with international financial institutions induced a number of 
immediate positive effects, namely:
–  providing  resources  on  attracting  external  funding  through  both  gradual 
borrowed resources and through the “Initiative of coordination in the banking field 
in Romania”, in which parent banks of major credit institutions with foreign capital 
from  Romania  have  undertaken  in  the  maintain  exposure  of  such  groups  from 
Romania and to increase the capital of these institutions to deal with  the possible 
negative effects of economic crisis. Besides, in the first half of this year, the rolling 
degree for the external dept was aproximatly 82% above the projections from the 
initial program signed with the international financing institutions;
– mitigating volatility of the national currency exchange rate, at the same 
time with the reduction of risks related to the external financing;
– reducing the risk premium charged by the foreign investors in Romania.
Internationally,  a  number  of  economic  indicators  tend  to  suggest  a 
stabilization of activity. There are, however, a number of potential risks that may 
slow the current trend:
– revitalizing the U.S. economy and of some economies of the euro area was 
caused mainly by a temporary measure. The perspective of the very high public 
debt in many developed countries will put increasing pressure on the interest rates. 
Thus, the speed of the return of savings could be slowed;
– the  effects  of the fiscal stimulus  in these  countries and  of the provided 
financial aid given to the financial sector will diminish during 2010;
–  lending  will  continue  to  be  limited  to  a  medium  time  horizon.  It  is 
expected  that  the  economies  in  Europe  will  be  the  most,  affected  because  the 
crediting through the banking system is predominant;
–  slow-absorption of the unemployed can generate social tensions;
– the regional context is uncertain. The possibility of contagion due to the 
devaluation of the currencies of the Baltic countries is still relatively high.
Romania’s economy is highly integrated in the EU economy, so any external 
negative shock will spread quickly internally.
The evolution of the financial crisis
The evolution of the financial crisis will lead  developed economies towards 
a  deflationary  spiral  in  the  next  year  or  even  for  a  longer  period,  as  deficit 
reduction efforts will take large, and probably we shall assist to the withdrawal of 
some weaker states from the euro area.
The growth in U.S. and the euro area was based largely on the consumption
and debt over the last two, three decades and everytime the economy has tried to 
eliminate the excesses and errors resulting from excessive growth of the credit, the 90
interest rates were low and the debt burden became even greater, notes the analyst. 
This type of model succeeeds on a  short term, but in time needs more and more 
substantial stimulants as to avoid a collapse – “which  would actually be  just a 
return to the balance”.
This evolution was facilitated by an “irresponsible approach” of the debt and 
speculation  problem,  evident  in  the  ease  with  which  they  were  saved  from 
insolvency imprudent countries and private companies from Mexico and countries 
from the Southeast Asia to the fund Long Term Capital Management in 1998. This 
has  contributed  to  an  overall  increase  in  debt  burden,  accumulated  during  the 
credits offered too cheaply. “And now it would be too simplistic and naïve, for  the 
West to believe that can easily escape the sins of excess crediting in the past 20 
years” (Nick Beecroft). The major transformation of the private debt into public 
debt “seemed until now as a panacea”, but cracks in this edifice are beginning to 
appear, as one can see for the example of Greece.
In  the  euro  zone  we  could  witness  the  secession  of  some  of the  weakest 
members, which is probably the desire of Germany, as suggested by the German 
analyst Wolfgang Munch in a commentary from the Financial Times (“Narrow the 
euro area and established a European fiscal union ”).
Conclusions
Romania could face to the economic crisis and succeed on the medium and 
the  long-term in the European  Union if it  will focus on areas that bring added 
value, where we are competitive.
The faith of Romania on the medium-term depends on its capacity to support 
these strategic areas, which bring added value, competitiveness, external orders, 
and not least, new jobs.
REFERENCES
• Isărescu, Mugur, 2010, Criza financiară internaţională şi provocări pentru 
politica monetară din România, p. 5-8.
• Nicolae, Crenguţa, 2010, Saxo Bank: Criza va aduce deflaţie şi excluderi 
din zona euro, http://www.businessmagazin.ro/actualitate/afaceri/.
• Roşca, Cristina, 2010, Intervenţia FMI în România nu a fost un succes 
răsunător, http://www.zf.ro.     
• Guvernul României, Programul de guvernare 2009-2012, cap. 1, “Con-
textul macroeconomic intern şi internaţional”, http://www.gov.ro.
• htp://www.bnr.ro, Raport asupra inflaţiei, august 2010, p. 7.
• http://www.insse.ro, Produsul intern brut în trimestrul II şi semestrul 1 
2010, p. 2.  

Criza financiară internaţională şi provocări pentru politica monetară din România,

Intervenţia FMI în România nu a fost un succes răsunător,

Produsul intern brut în trimestrul II şi semestrul 1

Programul de guvernare 2009-2012, cap. 1, “Contextul macroeconomic intern şi internaţional”,

Raport asupra inflaţiei,

Saxo Bank: Criza va aduce deflaţie şi excluderi din zona euro,

FINANCIAL CRISIS AND ROMANIA’S ECONOMY

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FINANCIAL CRISIS AND ROMANIA’S ECONOMY

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