February 6, 2011 / 5:00 PM / 8 years ago

Romania strikes fresh 2-year deal with IMF

BUCHAREST (Reuters) - Romania agreed a new two-year deal with the International Monetary Fund and other lenders, its President Traian Basescu said on Sunday, reassuring investors it is still committed to fiscal reform.

Romania, whose economy is expected to have shrunk about 2 percent last year, has a 20 billion euro ($27.2 billion) bailout agreement led by the IMF, which ends in May, and analysts had expected it to strike a new, smaller and precautionary deal.

“The agreement is for two years,” Traian Basescu said in a speech, adding it was precautionary, meaning Romania would only draw on the 5 billion euros of funding — 3.6 billion from the IMF and 1.4 billion from the European Commission — if needed.

“It is necessary that we have these funds available for whenever we need them.”

Romania has passed painful and unpopular austerity measures to stick to its current deal, from which it has received more than 17 billion euros, including cutting public salaries and raising value added tax.

Analysts had expected it to strike a new deal — given the commitment shown to the current deal, which contrasts with neighbouring Hungary — but some had said the government might prefer a shorter deal to expire before elections due late 2012.

The agreement will help maintain investor confidence as Romania’s economy struggles out of recession and will show its willingness to implement more reforms to cut its budget deficit to a targeted 4.4 percent of gross domestic product this year, from 6.6 percent in 2010.

Basescu said Romania, which has received more than 17 billion euros from its current deal, would not draw on all the remaining funds, borrowing from the European Commission but not the IMF.

The government of Prime Minister Emil Boc, a close ally of Basescu, has often struggled to force reforms through but now appears more secure after surviving four no-confidence votes last year.

That has helped reduce yields on government debt, particularly after it abandoned a self-imposed cap on yields in November, and the country can now raise debt more easily.

Analysts had previously said a successful review and new deal would reassure markets, lending support to the leu currency — which has lost 5 percent against the euro since March 2010.

Boc’s popularity is still suffering from austerity measures and its support was at just 15 percent in the latest poll, indicating he has plenty of work to do to regain ground before next year’s elections.

Editing by David Holmes

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