Was Ion Stan Right?

My name is Legion, for we are many

All day I’ve been wracking my brain, trying to see if there was any way to prove if what Ion Stan said was right or wrong. Essentially he is stating that the IMF is deliberately undervaluing Romania’s GDP by 20% in order to induce politicians (and economic “experts”) to take on IMF loans.

Well there’s no way to prove something definitively, especially as I sure as heck do not have access to raw numbers on Romania’s economy. But it turns out there are some things you can do to check out his claims. I’ll go ahead and tell you that it looks like Mr. Stan was largely quite wrong. Nonetheless, some interesting things turned up.

One of the few benefits to membership in the European Union is that there is a whole horde of bureaucrats in Brussels who keep track of just about everything and provide reams of data online. There is a wonderful website called Eurostat which allows you to access all sorts of data, including economic data.

I ran into a couple of problems. The first is that the data is self-reported, that is to say, the figures are provided to Brussels from Romania’s national organizations. Therefore if Mr. Stan were correct, these numbers are false to begin with. The second problem I ran into was that some very key information is missing from the Eurostat website, particularly of interest for me was that the M3 data was missing as well as other valuable data on the money supply. There’s nothing I could do about this, sadly.

But I thought to myself that it would be interesting to compare the self-reported GDPs of various other countries and compare and contrast them to Romania’s. Unless the IMF was secretly corrupting the national data figures on all other countries, this might be a useful way to compare what’s going on and see if there is evidence of fraudulent manipulation of the figures.

Here’s what I found:

I didn’t include Germany here because it skews the Y axis and makes the numbers hard to see for Romania (i.e. Romania’s economy is so much smaller than Germany’s that the bars are hard to differentiate due to scale) but it tracks virtually the same as Romania and Hungary.

Basically you can see that at the end of 2008 the economy took a hit (no surprise there) and then has been chugging away more or less just fine. If Mr. Stan were correct and Romania’s GDP were 20% undervalued then Romania’s chart would look far different than the other EU countries (again, most of which not shown here on the graph but you can check them out yourself on the Eurostat website) and Romania would secretly be performing way above other EU countries in terms of growth percentage.

I think therefore it’s fairly safe to say that Mr. Ion Stan is blowing some patriotic conspiracy smoke up our asses.

Nonetheless, as I’ve stated on multiple occasions, Romania is deeply in debt to the IMF. Instead of relying on newspaper accounts about it, I thought I’d delve into the statistics straight from the horse’s mouth (the IMF website itself).

And what to my wondering my eyes should appear but this fun little chart:

Quite obviously you can see that Romania has an outstanding payment obligation of 1,589 billion SDRs in 2012 alone. What is an SDR? Well it’s a little complicated to explain but for now we’ll just say that it’s a kind of “currency”.

And how much is one SDR? At the moment 1 SDR = 1.17 Euros. Therefore 1,589 billion SDRs equals 1,8 billion Euros. And that is in 2012 alone. However you can see that Romania is scheduled to pay the IMF some 4,29 billion SDRs or just over 5 billion Euros in 2013. Now we’re talking some real money eh?

What makes this even worse is you can see by this chart that Romania hasn’t paid back the IMF one single ban for the last three years (all it has been paying is the vig). Instead it’s just been continuing to borrow and borrow like a drunken sailor with a credit card.

As I’ve noted before, you can see that in the last five years of Ceausescu’s reign, his government was busy paying back the IMF but had ceased to borrow money. However starting in 2009 (2008 is curiously missing from this chart) you can see just over 10 billion SDRs (about 11.7 billion Euros) have been borrowed which must be paid back in some form or another.

It looks like the Romanian government’s entire annual income for 2012 is projected (PDF) to be around 95 billion lei (about 21 billion Euros) so 1,8 billion Euros of that going to the IMF is a sizable chunk (roughly 8% or 1/12th). Think of how many ambulances and roads and healthcare and university classes and teachers and doctor’s salaries that could pay for instead, eh?

What can I say? If I were a political strategist for the PDL I’d go ahead and let those goofballs in the USL win this year’s general elections and let them bite the bullet when that gigantic series of repayments to the IMF hits in 2013 and 2014. You think things are bad now? Wait until you see what the government is going to to do to find the money to pay back these bankers in the next two years.

Hang onto your hats because it’s going to be mighty interesting how this plays out.

UPDATE – Well it looks like how the government plans to raise the cash to pay back these IMF bankers is detailed at length (PDF) in a letter that our dear friend and benevolent father Mugur Isarescu wrote at the end of 2011.

If you scroll down to page 12, you can find this fun nugget:

Our privatization efforts have not progressed as quickly as we had anticipated, but we remain committed to offering minority and majority stakes in a series of companies over the coming months. The structural benchmark on the appointment of privatization advisers was not met, but we intend to rectify this by the time of the IMF Board meeting (prior action). Privatization of these companies will be done in a market-friendly process and we will consult closely with IMF and EC staff. The transaction consultants will have the task of drafting evaluation reports, and recommending and justifying the offer price of the shares in view of a successful closing transaction. Our planned privatization actions are as follows:

• The first group of companies to be offered by end-April 2012 includes: i) Oltchim (sale of remaining public shares to strategic investor), ii) Tarom (IPO of 20 percent), iii) Transelectrica (SPO of a 15 percent stake plus a later capital increase of about 12 percent), iv) Transgaz (SPO of a 15 percent stake); and v) Posta Romana (minority stake). In addition, the copper mining company, Cuprumin, will be privatized by mid- February and the IPO of a 15 percent stake in Romgaz will be undertaken by end-June.

• The second group of companies includes i) Hidroelectrica (IPO of 10 percent to increase capital) and ii) Petrom (SPO of 9.84 percent stake will be re-launched), iii) CFR Marfa (majority privatization, possibly with the support of the EBRD and IFC). Appointment of transaction advisers for this group will be completed by mid-February 2012 (structural benchmark).

• The third group comprises i) Electrica Serv (majority privatization of all regional companies currently under creation); ii) Nuclearelectrica (at least 10 percent via capital increase); iii) S.C. Electrica Furnizare S.A. (including the supply activity transferred from SC Electrica SA, majority privatization); iv) the three remaining Electrica distribution subsidiaries (minority privatization). Appointment of legal advisers for this group will be concluded by mid-February (structural benchmark).

I’ve said it before and I’ll say it again – this is economic strip mining. First you hike taxes then you cut salaries then you cut government services (especially healthcare, which is detailed in this 2011 letter and presages exactly what the Basescu/Boc government did in January 2012, which caused all the protests) and then you sell off state-owned companies.

And long after these IMF loans are paid back, those companies will be in private (mostly foreign) hands and the Romanian people will never, ever get them back.

17 thoughts on “Was Ion Stan Right?

  1. Sam, as much as I like TAROM (they have gotten me safely from point A to point B numerous times, and as a secondary plus, the service has been good also), I think it’s more efficient for governments to govern, for pizza makers to make pizza, and for pilots to fly. The more tasks the government ends up taking (in addition to its main role to protect the borders, and perhaps to protect society from a breakdown by enforcing contracts and policing the streets – and even those tasks are debatable) – the poorer it will end up doing everything. TAROM is only doing well because it has to compete with other airlines, but in the case of a monopoly it gets even worse.


    1. Well then let me ask you – what does “govern” even mean? Should the postal services be part of the government or privately operated? What about the roads? What about the police? What about running the schools? What about the military?

      At some point you can take any job whatsoever and say a private industry could do it. The question is where do you draw the line?


      1. Authority (because that’s what “to govern” is all about it) should be exercised at THE LOWEST POSSIBLE LEVEL !

        Ideally, that would mean the individual.
        Realistically speaking, we won’t be there any time soon – but any step in the right direction would be a welcome development.

        Methinks you should ponder upon the political and economical implications of this – http://en.wikipedia.org/wiki/Dunbar%27s_number


      2. For that mental exercise (what role should government have), I highly recommend The Machinery of Freedom. You are a bright guy and you might or might not agree with things in it. It’s free and can be found at http://daviddfriedman.com/. The author is the son of Nobel laureate economist Milton Friedman. It can change your perception about society in general. Highly recommended if you have the time.


  2. Certainly there’s incompetence to be found in Romania! But under a democratic system, there is at least an ability for the people to put pressure on the government to reform these companies.

    I can’t speak for Cuprumin or some of these energy companies but I can tell you TAROM is a first-class airline and has been for years (see my post called “Flying Chocolately Goodness”). I don’t see how changing its management could possibly improve anything but profitability.

    Third, once an industry is privatized, the owners can do anything they like with it, including sacking (firing) thousands of workers. What’s going to happen to Romania’s economy if something like that happens? Is it better to have 10,000 poorly efficient employed people or 10,000 people out of work entirely in the name of efficiency?


    1. I think it’s better to have 10,000 people out of work in the name of efficiency, rather than sit around and do busy work for a meager salary at the expense of society. In the long run it is better for them (if they are young enough to learn new skills where they might actually end up productive). It is definitely better for society – remember that any sort of government spending is a tax, because it needs to be funded through direct taxation, import tariffs, devaluing the currency (inflation is a tax also on the purchasing public) or debt. Thus, any government spending cut is good for society at large from a macroeconomic standpoint. And the best effect of laying them off is to create incentives for mentalities to change and to finally break with the communist past.


    2. Sam

      When it comes to economic issues, you are a very ignorant man.
      Time and time again, this “let’s run the economy as a democracy” has proven itself to be a load of crap – and yet you still parrot the mantra.

      “What’s going to happen to Romania’s economy if something like that happens? ”

      It will become more efficient.

      The truth is that the free market (and not the politicians) is the best method of allocating resources. The fact that you cannot accept this speaks volumes about your emotional blocks.

      You extoll us to be more positive, and make Romania a better place.
      You say that improving the world is up to the individual.
      You say that politicians are a corrupt lot.

      And yet, when it comes to the free market – the private individual suddenly becomes a dangerous brute and the politician turns into an ally.

      Economics is not a morality play. We must choose what works best – not what our gut tells us.




      1. What individual are you talking about? The one raking in the profit or the poor sod working his ass off for a crap wage?


      2. Giuseppe: he is talking about both. This divide and conquer mentality (rich vs poor) was a communist strategy. It’s slowly creeping into the American mindset also.


  3. I’d rather sell those companies for a penny and see them in private hands than have them run by incompetent idiots put in place by political interests.
    You have no idea how many of these so called “state assets” the common man has to subsidies(hope I’ve said that correctly) and how many “black holes” there still remain in the economy as big, inefficient state companies.
    As for debt, it’s there, it’s growing but that’s a staple of “the way” of capitalism; we’re not at the level of some so called “developed” nations yet(that includes Greece or the US), and hopefully we’ll never be, but you never know.
    I for one own my house(no loans),own land and own pretty much all I need to survive an economic meltdown, god forbid one(ups, I’m an atheist, that was just for kicks).


    1. Over the last 20 years those traitors that have been running this country have been doing a great job of convincing the masses that everything and anything Romanian is a piece of crap, that no industry works and will never work in Romanian hands, that Romanians couldn’t even manage a public toilet and that we NEED foreigners to run and own (excuse me, I meant manage) everything from our national phone company to every bit of relevant resource on or in the ground.

      Why? Because once you can convince everyone that something like IMGB or Sidex is a worthless heap of junk you can then sell them for scraps to whomever will offer the highest bribe. Or you can give them away to your favourite shady business associate. I could write at great length about the ‘black holes’ that turned out to be highly profitable to the ones who got their hands on them for next to nothing. I’ve yet to hear about a business deal the Romanian government has done that was in the best interest of the country long-term. Only now are people finally starting to understand the utter devastation that these last 20 years have meant to Romania’s economic independence.

      „Votăm în scârbă, e adevărat
      Și țara-i praf – pulbere fină,
      Căci e mai ieftin să dai banu’ jos când cumperi o ruină”.

      Paraziții – Mesaj pentru Europa


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