Ceausescu’s Debt Crisis Through the IMF’s Eyes

2 Apr

Directly from the IMF archives:

“Over a four-year period starting in 1975, while Romania was engaged in a large-scale industrialization drive, the Fund entered into two stand-by arrangements with the country and made additional resources available through the Compensatory Financing Facility (CFF) to cover flood- and earthquake-related export shortfalls. By the end of 1980, Romania’s indebtedness to the Fund amounted to SDR 257 million (70 percent of quota, or approximately $330 million). The Romanian economy was in a fragile state by that time. The investment that had supported industrialization by bringing in foreign capital goods had also weak- ened the external current account during a period when the rising cost of oil im- ports and a series of natural disasters had left no room for excesses. The authorities therefore turned again to the Fund for assistance early in 1981, and a three-year stand-by arrangement was negotiated by May. The Executive Board was skeptical of the request, because the authorities would need both major policy changes and full cooperation from creditors to meet the performance criteria. At the very least, it was felt that the authorities should have requested an arrangement under the Ex- tended Fund Facility (EFF), which would have allowed them to stretch out repay- ments over a much longer period. In addition, the U.K. chair (represented by John F. Williams, Temporary Alternate) argued that Romania was unlikely to be able to roll over its large stock of short-term debts and questioned the staff’s judgment that the $9!/2 billion in outstanding convertible-currency debt was “manageable.”

Nonetheless, the arrangement—for SDR 1.1 billion (300 percent of quota, or $1.3 billion)—was unanimously approved.The Fund’s confidence in the Ceaus ̨escu government was misplaced, and mat- ters deteriorated rapidly in the second half of 1981. Part of Romania’s trouble was homegrown, notably in the form of abuses of international payments mechanisms and interbank credit lines by Romanian banks. To those troubles was now added the self-fulfilling fear of contagion from the crisis in Poland. Foreign banks were quietly but increasingly withdrawing deposits from Romania and canceling inter-bank credit lines. Refusals to roll over maturing loans led to arrears rather than re- payments. By the end of 1981, Romania had accumulated more than $1 billion in arrears to foreign banks, had totally lost access to new credits, and was therefore out of compliance with the terms of the stand-by arrangement with the Fund. Al- though the staff met on various occasions with major bank creditors in the fall of 1981 to explain the nature and extent of the measures the authorities were taking to strengthen their finances, they gradually came to accept the banks’ doubts about Romania’s commitment to reform. The Fund refused to waive the terms of the stand-by, and it allowed no drawings during the first year of the program other than the one made at the time of initial approval.

Romania began negotiating with a consortium of nine lead banks from six west- ern countries in January 1982, with the Fund staff participating as observers.9 By April, as those talks continued, arrears to banks were approaching $3 billion, in- cluding arrears on interest as well as principal payments. Even so, the Fund staff expected the government to reach a rescheduling agreement with the lead banks in time to resume the stand-by arrangement in June, a hope that was soon dashed. In June, the staff backed off and proposed instead that the arrangement be resumed with only a token (SDR 10 million) drawing and that more substantive drawings be deferred until the arrears were settled in some fashion.

The “token drawing” proposal was unprecedented, and it drew quite a bit of fire in the Executive Board meeting on June 21. The Board was, on the whole, im- pressed by Romania’s perseverance in implementing its adjustment program, and a number of Directors (though holding a minority of the votes) proposed that a full scheduled drawing (SDR 76 million rather than 10 million) be allowed. The Man- aging Director, Jacques de Larosière, insisted on sticking with the staff proposal as a matter of “prudence,” though he did note that this unique decision should not become general policy.

Part of the explanation for the Executive Board’s optimism on Romania was that official creditors had signaled a willingness to reschedule debts as soon as the Fund arrangement was resumed; a July meeting of the Paris Club had been scheduled for that purpose.12 That part of the package was successfully concluded in late July, but negotiations with bank creditors continued for several more months. Romania and the banks finally signed a rescheduling agreement in December 1982, ending this phase of the crisis and permitting a resumption of the stand-by arrangement.

Following the resolution of this crisis, the Romanian economy deteriorated fur- ther, and Ceaus ̨escu’s policies eventually lurched into a totally new direction. Around 1986, after difficulties arose in repaying the Fund and other creditors, the government began appropriating an increasingly disproportionate share of domes- tic output, even of basic foodstuffs, to export for foreign exchange. In a disastrous overreaction to the strains of 1981, part of those revenues were then used to repay foreign debts early and as rapidly as possible. As hardships and domestic unrest grew, Romania ceased providing basic data to the Fund in 1987 and repeatedly postponed the scheduled Article IV consultation.”


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