When talking about the public debt and external debt of Romania we have to face a twofold truth. First: the public debt of Romania is rather low, by both interational and European standards. The same is true, second, for external debt. On the other hand, newspapers all over the world report currently that Romania is in danger of national bankruptcy and might need external help to avoid default. The International Monetary Fund, IMF, and the EU are said to be the fitting institutions in this regard. Joaquin Almunia declared already that the EU is ready to assist Romania with a loan if needed to avoid national insolvency. So, the question is, how comes, that Romania seems to enter again into financial troubles? Is it all the fault of the financial crisis?

Public Debt in Romania

Let’s start with a short resume of the last years. After Romania barely avoided default in 1999 with the help of the IMF, public debt in Romania as a percentage of GDP has been relatively low during the last years. Compared to Western European countries government debt in Romania and budget deficits were even modest. The budget deficit fluctuated around some – 2% of GDP after 2000, while the public debt of Romania measured as a percentage of GDP has been even shrinking, from 26% in 2000 to some 12.40% in 2006. That was perfectly fine even with the stability and growth pact of the EU, even though, during the last years the EU urged Romania not to loosen it’s fiscal policy.


On the other hand, the problem here – when focusing on the fine looking figures, only – lies in the method of measurement in combination with an additional factor, the the weak tax collection in Romania. The GDP of Romania experienced a strong growth in recent years (up to over 8% in 2008) and grew even stronger than public debt, which in absolute terms also has been growing, though, at a slower pace. One should assume, that this way sustainability of debt could be taken as granted (as a rule of thumb), as public revenue should increase likewise with GDP growth and money could be paid back in the future. However, this has not been the case in Romania. Romania’s fiscal sector had to face shrinking revenues all over the last years and an eroding tax base, even though, together with GDP growth, also employment in Romania was on the rise. The tax reforms introduced so far yielded only slight increases and could not make up the weaknesses of the tax collection system and the still negative impact of high social contributions. The Romanians’ eagerness of tax evasion and the propensity to activities in the shadow economy (estimated to be somewhere around 30% of GDP) might play some additional role. Hence, we can conclude, that other countries might have more debt, both absolute and relative to GDP, but they typically have also better prospects to pay the debt back.


This notion is also underpinned by the way Government spending in Romania is often allocated. Goverment spending in Romania has been hardly planned and in the end allocated to current spending, rather than to badly needed long-term investments, like infrastructure or other, competitvity rising measures. Last years, for example, Romanian administratives, espeacially teachers and professors claimed a salary increase by 50% and where finally granted increases of up to nearly 30% (according to the salary level). While long term-investments in education (increasing quality and quantity) would have been a good decision, even at the price of risen public debts, such populistic measures seem at the current stage of the economy of Romania desireable, but out of place.

Another issue is, that public debt in Romania is mainly externally financed.

Image 1: Romanian Government Debt and Romanian Budget Deficits

Romanias Public Debt, Government Debt, External Debt and the Budget Deficit

Source: Eurostat, Gardo 2006, own graphic [3]

External Debt in Romania


The lion’s share of external debt in Romania is held by the private sector, though. This is because of an amazing surge of consumption in Romania, which is often credit financed. Just like government debt, this is mainly external debt. And even though, this issue is mainly one of the private sector it could easily have public consequences. Due to the – rather unforeseen – financial crisis investors trust in emerging marketssuch like Romania is in decline, while exports tend likewise to decline. This is true for Romania, which is deeply involved in the strongly affected automobile industry, though Dacia has some fine sales due to its cheap vehicles. However, also Dacia’s sales seem declining compared to the last year. As a consequence, the anyhow deeply negative current account of Romania is set further under pressure what again detracts investor’s trust and makes external sources for financing, both private and public debt harder and more expensive to access.

Has Romania a Need for Bailout?

When following Western media it seems currently that Romania is in need of urgent help to avoid bankruptcy. Romania’s bonds have even been downgraded to »junk« by some rating agencies and the EU confirmed it’s readiness to help Romania with an emergency credit. The Romanian presedent, Traian Basescu, though seems – currently – somewhat more optimistitic. On the one hand, he plead for an external credit in ccoperation with the IMF and the EU, in order to face the challenge of the financial crisis. But Basescu talked rather about a »safety belft for the private sector« while he expressed little fear that the Government of Romania would be unable to pay back its public debt. This safety belt could be used to finance the Current Account deficit and to back the private sector if this would be unable to pay back its debt. The Romanian economist Daniel Daianu (same source) stresses the same, though with the slight difference, that he rejects the implaction of the IMF as this would imply the obligation to cut public expenditure. Daianu still stresses that Romania’s public deficit and debt is a small one and any cut would be »harmfull« (»rău«). However, the former Prime-Minister Tariceanu announced likewise that Romania does not have a need for assitance, but for a »capable government«. We well come soon back with more news on the public debt and budget deficit issues of Romania.

Category : 2009 / Crisis Romania / Economy of Romania / News / Politics of Romania


yosam December 6, 2009

According to president comment of the seat belts, it seems he has already seen that the local sectors seem to have alot of funds. may be which is not in use as per day to day business run-up. therefore, he saw no need to seek for a foreign assistance yet they can help them slaves at home. And more so due to political influence, also there may be outsiders who look at his Gov’t on the other way round, in that they may pressurise to give him a loan so that they can squeeze the FERA on the whole which he had seen already.
However, does his Gov’t knows all its expenditure and care about Romanian people and its shoot up rapide growth? which they had acquired in the past short decade in there transition which seem to have worked safely?
And then, has he realised the cause of his Gov’t failures or the experts just want to give him a loan without correcting his past mistakes? then if so , his Gov’t has to think fast and act at the end. and more so, him self as a leader must look at the failure in the system, he may be with some cobras in his Gov’t! not to behave like African gov’ts.

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