Solutions of economic recovery in Romania

These were the conclusions of the yesterday's ZF Expert meeting where there took part Florin Pogonaru, president of the Association of the Romanian Business People (AOAR), Florin Andronescu, business developer of Sanador, Dan Ioan Popp, president of Impact Developer & Contractor Bucharest, Florin Cîţu, financial market manager of ING Bank, Dan Pascariu, chairman of the Board of Directors of UniCredit Ţiriac Bank and Doru Lionăchescu, managing partner of Capital Partners.

Two years after the beginning of the crisis, marked by the collapse of the Lehman Brothers investment bank, Romania has not yet succeeded to find its way to recovery. From the speech asserting "the crisis won't reach us", Romania has become the country with the deepest economic decrease in Central and Eastern Europe. Why? The conclusion of ZF Expert was: the bad governing.

"Lehman Brothers happened to be, but there could have been any of the great investment banks. The first signs started to come from the summer of 2007. In the spring of 2008 Bear Stearns was saved, and in summer the great mortgage banks Fanny Mae and Freddie Mac were. The American State wanted to delay its intervention until the last moment, as they were afraid just of the idea that in capitalism the state must intervene. (...) I can understand the Government's error by omission during an electoral year, but I cannot understand the decision of the NBR to persist in the idea that there would be an economic increase in 2009, 6-7 months after it had become obvious that we were going straight ahead to a catastrophy", said Lionăchescu.
 

How Everything Began
The bankers and business people present at the yesterday's meeting of ZF Expert are of the opinion that the collapse of Lehman Brothers caused a confidence crisis, but that nobody guessed its real dimension.
"There was not the problem of barriers that fell, but that there would be difficulties in the attraction of liquidities just because of the confidence crisis. The short-term liquidity problem may appear anytime because of the withdrawal of deposits. Then, too, there was a massive withdrawal. Towards October (2008 - n.red.) the course of the parent banks' shares decreased, a thing that was media-covered and we were confronted to massive withdrawals", said Pascariu. He admits that for two monhts the banks stopped financing, "naturally until people recovered their senses" and after that they increased the interests.

As a response Doru Lionăchescu, at present a consultat in the field of mergers and acquisitions and a former banker, is of the opinion that the market regulator should have adopted a much tougher policy.

"Banks are rational economic actors. In the financial institutions there are found some of the most enlightened minds. The problem is related to the fact that they act into a regulated system. If the regulator tacitly accepted this policy, to transfer the idea of getting out of the crisis towards the real economy, they went straight there. There were sacrified 20 million people for saving three or four banks that maybe should have died and 160,000 mortgage credits", asserted Lionăchescu.

Another banker, too, Florin Cîţu, the financial market manager of ING Bank, considers that Romania and generally the states in the Eastern Europe put themselves into this situation, that is, they have not had a correct macroeconomic policy.
"The macroeconomic policy was completely wrong. We chose to win the short-term battle with the exchange rate, but we forgot that it is a long-term world battle", he said.

What Romanian Business People Were Doing
Among the Romanian players, the most relationships with Lehman Brothers were held by the Impact developer, the American investment bank having bought one percent of the company's stocks.
"The starting point of the crisis lays around the mortgage credits. Some years ago, we had started to get modernized and we created a relationship between our activity and the capital market. (...) Lehman Brothers expanded its portfolio to the emerging countries. They came to us and they bought. We got close, those months, to Lehman Brothers because they got a due-dilligence made. The shock was for two times", said Dan Ioan Popp.

Present at the meeting of ZF Expert, the businessman Florin Andronescu, the founder of the Flanco network, sold during the economic boom years, is of the opinion that the origins of the crisis should be looked for in the attempts of September 11th, 2001, the first moment when confidence tilted. Related to the sale before the crisis, he said he "was lucky".

"Investments in Romania, with some exceptions, were purely speculative, a capital that goes in and out very quickly, that gets scared quickly enough, that plays on currencies or on other instruments. There was not a serious construction, except for some cases here and there. I constructed two businesses that were based on consumption, a consumption that proved to not have been supervised properly. (...) There were not built production facilities. We havent't done anything else but moving products from one place to another", is the opinion of Andronescu. He also made a forecast related to the segment "the least in pain", that will be represented by services.

ZF Expert - Two Years from the Collapse of Lehman Brothers

How did you envisage the collapse of Lehman Brothers?
Dan Pascariu:
I don't think anyone has imagined the scale the crisis would reach in the financial field. We discussed within the bank on the next days from the fall of Lehman Brothers what we would do. Nobody put the problem it would be the collapse of some barriers that were thought as unsurpassing. The problem that arose immediately was there would be difficulties in attiring liquidities. The liquidity deficit came very quickly. There was not put the problem that the parent banks would interrupt the financing lines, but there was the possibility of some massive deposit withdrawals.
There was, indeed, a great withdrawal, in October. There was a massive decrease of the course of stocks of the parent banks of the banks in Romania and several local clients, natural persons, got scared.We were confronted to massive fund withdrawals during that period.

When I explained to provincial clients why there was a need for more collateral they did not believe me. Not even in the center of the power and of the crisis they were not aware of the disaster spread. The state intervention may be certainly seen as a loss nationalization, but there was a system crisis. The part of the state is to make steps in order to protect the public interest, and the financial system has a huge public utility.
The state was obliged to intervene, as, in case it had not intervene they would have collapsed, where would have reached that lack of confidence in case the state had not intervene?
The banks that needed state intervention represented 3-5% of the total of world bank assets, but if they had not been saved, by the domino effect, they would have inducted all the others.

Dan Ioan Popp:
The starting point of the crisis lays around real estate, around mortgage credit. Some years ago we had started to get modernized. We created a relationship between our activity and the capital market. Since 2004 we got closer to the great capital. Lehman came in Romania; they bought stocks from us and from others. We got close to this world and to Lehman Brothers. We didn't think how bad it would be. If we had thought, I would have been one of the world's tycoons. Cataclisms cannot be forecasted.
Apparently we discuss economic problems, but causes are always of behavioural, psychological nature.
Psychology puts us in such situations. Anyone of us has two parts: desire versus ponderation.
The conflict between these determines the direction. The problem is now that we are dominated by unconfidence and pessimism.
I think the bases of the crisis were laid in 1989, when the arising of the Eastern Block on the free market created a new boom.

Florin Andronescu:
It was just a happening that I sold a part of my business (Credisson - a company of credits for consumption) before the crisis. I didn't have a feeling.I think all started from the attempts of 9/11/2001. These affected confidence, all is a matter of confidence. In Romania, what was made on speculations collapsed. Here there was not a serious construction during the last years We didn't do anything else but to move money and products.
I constructed two businesses on consumption, but the consumption, too, has its limit where it can grow to
In a way I am more protected in crisis because services are flexible. The production of goods is the one that suffers more during crisis.
The area of medical services is on growth because it is just at its beginning and people want services of a better quality
If we're talking about tourism, for example, most of the businesses were created in order to serve the interests of a family/groups, not for spreading businesses.

Florin Pogonaru:
I remember that in the fall of 2008 I was negotiating with politicians to see multinannual budgets, but we were told that it was a breach of the Constitution. When the crisis was knocking on the door, politicians were explaining to us that there were resources for the increases of pensions and salaries
Lehman Brothers was the burst of unconfidence - it was the rabidness of the trade-off risk.
My son was telling me back then that we had too much cash, that we should have invested more. We were just trying to uprise a private equity trust. A provincial, as Romania was in case of this crisis, is always put on sleep in crisis. He thinks that until the wave reaches me, it breaks
The Lehman Brothers moment broke the idea that there would never be a system collapse
What I did with my deposits? We spread our money to several banks
We increased our exposure on euro. We were thinking back then: if this bank collapses, too, anyway all of us would close, anyway we would reach then the lowest level. You cannot protect yourself of collapse.

Doru Lionăchescu
My opinion is that Lehman Brothers happened to be, there could have been any of the great investment banks.
The first signs came from the summer of 2007. In the spring of 2008 Bear Stearns was saved and in summer the great mortgage banks Fanny Mae and Freddie Mac.
The American State wanted to delay its intervention until the last moment, because it was afraid just by the idea that in capitalism the state must intervene.
Why has the Romanian economy fallen so badly? Because of the bad governing. Reality has been denied for months
What should the government do? I would have expected a coordinated response from the part of the NBR and of the government.
The NBR has not understood the height of the crisis but when it was too late.
I cannot understand the error of the NBR to persist in the idea that there would be an economic increase in 2009, 6-7 months after it had become obvious that we were going straight ahead to a catastrophy

Would it have been better to let free the exchange rate during the autumn of 2008?

Florin Cîţu:
What happened during the weekend after the fall of Lehman Brothers? Monday morning, you did not have any more trade-offs to transactions. On external level you could not make transactions. There was a too great difference between bid/ask, that is, between the demand quotations and the offer.
The exchange rate was of 3.4 -3.5 lei/euro, anf the NBR attracted deposits then of 1.7 billion lei.
There was a negative shock globally, that determined a liquidity crisis globally.
We had the disadvantage of an euroized economy. By fiscal regulations, by the forbiddance of prices in euros we should have protected ourselves by the euroization of the economy. Romania put itself in the situation to reach 60% of credits in euros out from the total of credits.
Then, there would have been better if the exchange rate had been let to fluctuate freely for a couple of days. If it had reached 12 lei/euro for a couple of days, there would have not been any problem What was important was its subsequent evolution
We chose to have a short-term battle, but we forgot the long-term battle of interests. In Poland the exchange rate grew by 40%.
The exchange rate was a good outlet to free the stress in economy. The NBR took the money from the cash market because it wanted to support the exchange rate.

Dan Pascariu:
It was not good th let the exchange rate high, because 60% of the bank assets were and are in currency.
Romania is a country that is very much based on currency from the point of view of consumers' psychology.
The exchange rate increase would have inflicted a terrible panic within the system. From the point of view of the bank system and of the clients, a bursting exchange rate would have been dramatic.
For two months the bank financings stopped, until the people recovered their senses.
Banks started to increase the interests for deposits as the credits/deposits ratio was of 133%.

Are banks guilty for the spread of the shock that the crisis hit Romania with?

Dan Pascariu
Banks responded during the 2004-2008 period to a demand, to a need; the people wanted houses, cars, we financed them
If we had been able to reduce the loans granted, there would have been ideal, but nobody came to return the credits.
The banks have not cut the credits, but they increased the interests for deposits. We started to attract deposits in lei and currency.
We increased the interests to credits. Sure, then nobody wanted to take credits anymore. The demand for credits decreased by 90% between March 2009 and October 2009.
Banks could not accept losses. These could not be compensated with the previous profits.

Doru Lionăchescu:
We could not have expected banks not to seek for profit, but the idea was that if the regulator guides them on a direction, they go straight there.
The regulator accepted to transfer the exit from crisis from banks towards the real economy.
There were sacrified 20 mil. people, that is, the Romanian economy, to save 3-4 banks that should have fallen and 180,000 clients with mortgage credits in currency.

Dan Ioan Popp:
The sophisticated bank mechanisms have not come from the Martians. The financial products arose following the bonus system. Enlightened minds knew to cover with derivatives the real economy.
Why the demand for houses fell? Because of the uncertainty regarding revenues and of the uncertainty regarding the qualification for credits.
We're talking about the real estate market as if it were an institutional market, but under 2% of the transactions on the real estate market are accomplished with economic agents, that is, there are dwellings from developers, and three years ago they were 5% out of the total.
The real economic environment was left by the banks in favour of the state. As long as the banks' profits come from the state, they will not come back into the real economy.
Economic agents are pushed to be credit suppliers, because of the banks' withdrawal from the market.

Doru Lionăchescu
With the tacit agreement of the NBR the banks extract for themselves monopoly, oligopoly profits.
It is not normal even 1 dollar profit in the bank system when the business reduces by 50%, when businesses of billions of euros are under insolvency.
It is inadmissible that the financing price in lei would not be controlled, that the NBR could not transmit to commercial banks the cheapening of credits in lei.
Have we learned anything out of this crisis? My opinion is that, globally, we haven't. Because they were helped without having been asked nothing in exchange, because of the moral hazard, banks consider themselves the masters of the world.
After two years of crisis, the Anglo-Saxon bank system coks a snook to governments.

What will be in two years' term?

Florin Pogonaru:
I see a lassitude status. I think that the evolution of economy will continue in a lassitude status, in a "works enough"-type scenario.
I seee a side economic increase, because the driver that generated the increase was the EU convergence process
The problem is that the insolvency in SMEs becomes dramatic and the problem is from what limit on the prudence of the NBR becomes detrimental?
The government should tax the banks and the money should go to SMEs that cannot take credits now as being risky.

Dan Ioan Popp:
For the next period, it depends who we are talking about? There will be a portion of this nation that will not hang around
We must start on our way with optimism: that there are citizens that find new solutions.
All the time we were based on the idea "when does Santa come?". I still remember now how much I struggled for my first credit.
We introduced the idea of "villas in installments".
Clients's morale is bad. We sell therapy, the sale speech became incredible, we must raise our clients' morale, we must make them be confident.
Over two years - there will be a small, quantum change, of plus/minus 0.5% of the GDP.

Dan Pascariu:
According to some macro researches of the bank, during the following 2-3 years Romania will become again one of the development vectors in Eastern Europe.
Unfortunately, we are en route to the type of democracy in Latin America, where politicians are "masters" on "feuds".

Doru Lionăchescu:
Without an annual economic increase of minimum 2-3% we cannot ensure the external debt service.