sâmbătă, 18 august 2012

Marian Dusan: The Secret of Debt

Last week we saw Romania’s assessment mission, headed by IMF’s Eric de Vrijer, come to a close. Our country’s review was a fairly positive one, although we did get a lot of homework, not to mention a low grade on the subject of proper conduct.

The majority of the initiatives suggested by our government were either rebuked, or postponed for 2013 or later.

IMF’s main objective is easily understood: starting this year, Romania will have to begin making back payments from the 20 Billion EUROS loan taken in 2009. The most difficult will be the year 2013 when our country will have to reimburse up to 5 Billion EUROS, which means almost 4% of Romania’s GDP. IMF cares for one thing only: not to lose out on the amounts loaned, and therefore they will be keeping us and our expenses under a tight leash so that we may pay back our debts as soon as possible.

From an ethical standpoint, this is the right thing to do, since we should return all the money we have borrowed. However, from an economic standpoint, it is easy to see that the payback will slow down our own economic growth. I am not speaking against the decision to take out this loan – at the time, it was the only option. 2009 was a critical year, with enormous pressure on the Romanian and international banking systems, and therefore at the time, this loan was the only thing keeping the Romanian currency from collapse.

However, I’d like to let you in on a little secret: smart countries ALMOST NEVER pay back their loans. You may find this strange, but money has two values: a nominal value and a real value. The nominal value of 1000 RON for instance, will remain fixed in let’s say 30 years’ time, when 1000 RON will still mean 1000 RON.  The real value on the other hand, is a completely different matter: right now with 1000 RON one can purchase a cart full of grocery goods. 30 years from on, we’re lucky if we’ll be able to afford just the cart, without any groceries; because as time passes, all monetary value is decreased due to inflation, and the purchasing power for each monetary unit is constantly decreasing with it. But how can one not pay back a loan? Simple: you just roll over the debt until its nominal value will be so low that it will mean next to nothing. There are however, two essential conditions that have to be filled: the interest rate has to be lower than the inflation rate, and the amounts borrowed would have to be invested in organic growth. If I’m only borrowing money for domestic spending, then I am heading straight for bankruptcy.

So what should the Romanian government do? Obviously, to refrain from pushing the country to meet the payment deadlines in the coming months. Furthermore, this step has already been taken as a new credit line has been opened to Romania and I bet that it will be already used by 2013, at the latest. And please remember that next year we have to pay back 5 Billion EUROS. In my opinion, the IMF debt should never be paid back, but permanently rolled over until inflation can “take care” of the problem for us.

There is one more issue: using at least some of the borrowed funds to create economic growth. This means that the government has to redirect money towards investment. Unfortunately, this is the very chapter where our government has had very poor results, at least thus far. The economic scandals, the campaign socialist promises (luckily they were only promises), the disrespect of state institutions have created an anti-business image for the USL government. The current Romanian debt is not very large, but it cannot be paid back without significant economic sacrifices. The management of said debt entails wisdom and a long-term strategy. Its failure will mean sentencing Romania to a long, long time of economic standstill, as we cannot grow out of debt. Its success will mean a rate of economic growth superior to that of inflation rates and paid interest rates.

So to all you decision-makers and voters out there: choose your actions wisely, especially on

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