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By Chris Bryant in Vienna

Published: February 7 2011 09:55 | Last updated: February 7 2011 09:55

Romania is set to obtain a new ¼5bn precautionary loan deal from the International Monetary
Fund and European Union, its president has confirmed.

Traian Basescu said in speech on Sunday that funds would serve as a backstop and would
only be drawn if strictly necessary. The safety net will remain in place for two years.

The package is likely to reassure investors given the still lingering risk of a spillover from
Europe¶s sovereign debt crisis and the impetus the IMF may give to further structural reforms
in Romania.

Analysts also said a precautionary deal would help lower the government¶s borrowing costs.

The deal is subject to approval by the IMF board and European Commission and would
replace Romania¶s current ¼20bn IMF/EU/World Bank agreement, which expires in May.

Under the current accord, Romania¶s government has pursued some of the continent¶s
toughest austerity measures, including a 25 per cent cut in public sector wages and a 5
percentage point rise in value added tax.

These policies contributed to the severity of a recession that has gripped Romania since the
end of 2008.

After contracting by more than 7 per cent in 2009, the economy is expected to have declined
by a further 2 per cent last year, even as most other countries in central and eastern Europe
returned to growth.

As a result, the government has seen its popularity wane amid a series of large protests against
its austerity policies. However, a succession of no-confidence motions tabled by the
opposition has failed to unseat Emil Boc, the prime minister.

The government expects growth of about 1.5 per cent this year and is targeting a budget
deficit of 4.4 per cent, an improvement on last year¶s 6.6 per cent shortfall. Bucharest did not
plan to draw on the final ¼1bn instalment of its current IMF loan, Mr Basescu confirmed on
Sunday. Romania has broadly stuck by its commitments to the IMF ± unlike in neighbouring
Hungary, where the government last summer walked away from talks with the Washington-
based lender after a fractious round of budgetary negotiations.

On Friday Hungary¶s economy ministry said the IMF should show some ³modesty´ and ³self-
criticism´ because of alleged professional errors it had made examining last year¶s budget.
The IMF had earlier criticised the new centre-right government¶s ³temporary and
distortionary´ revenue-raising measures, as well as its alleged weakening of economic
governance.

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BUCHAREST | Mon Feb 7, 2011 12:01pm EST

BUCHAREST Feb 7 (Reuters) - Romania's economy is seen growing up to 2 percent this year
and up to 4.5 percent in 2012, helped by Romania's new IMF-led precautionary aid deal,
Prime Minister Emil Boc said on Monday.

"The objective of the new deal is economic growth," Boc told reporters one day after the
country's president announced the recession-battered state will get a new two-year deal with
the International Monetary Fund, European Commission and World Bank. [ID:nLDE7150EH]

"For 2011 we forecast growth of 1.5-2 percent and of 4-4.5 percent for 2012."

The most recent Reuters poll of analysts foresaw growth of 0.5 percent in 2011 against an
IMF forecast of 1.5 percent. (Reporting by Luiza Ilie; Editing by Patrick Graham)

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Romania will sign a precautionary accord with the International Monetary Fund and the
European Union worth 5 billion euros ($6.8 billion) to provide a safety net during Europe¶s
sovereign-debt crisis, President Traian Basescu said.

The Balkan nation doesn¶t expect to draw money from the two-year agreement, which will
reassure investors that disciplined fiscal policies will remain in place through a general
election next year as the government narrows the budget deficit to below 3 percent of gross
domestic product in 2012, Basescu said yesterday in a televised speech from Bucharest. The
IMF will set aside 3.6 billion euros for Romania under the new deal, while the EU may
provide 1.4 billion euros in case of an emergency, he said.

³The agreement is necessary because the risks in the region are still high,´ Basescu said. ³We
are in a sovereign- debt crisis and we don¶t know how the situation in other countries can
evolve. There¶s also a political risk in Romania if we consider the elections and that¶s why I
insisted that this agreement be for two years.´

Romania faces growing public opposition to its austerity program, which it launched to win a
20 billion-euro ($27 billion) bailout in 2009 from the IMF and the EU that it will conclude in
May. The government pledged to narrow the gap to 4.4 percent of GDP this year after cutting
public payrolls by 25 percent and raising a consumption tax by 5 percentage points to 24
percent. That is weighing on the economy and put Romania into the EU¶s second-worst
contraction after Greece in the third quarter.

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Economic output probably shrank 2 percent in 2010 and will expand 1.5 percent in 2011,
according to the Washington-based lender¶s projections. An IMF mission is in Bucharest until
Feb. 8 to discuss the country¶s economic situation.

Romania will sign the precautionary loan in March to strengthen its credibility, upgrade its
transportation and energy industries, streamline the fiscal system and help absorb EU funds
worth as much as 32 billion euros available through 2013, Basescu said.

The country won¶t draw the last tranche of about 1 billion euros from the current agreement
scheduled to be released in March because the central bank has enough reserves, Basescu
said. The government will draw the last part from the EU to finance the budget deficit, he
said.

The government needs to cut its deficit beyond the targets outlined under its current loan
accord before its debt is upgraded from junk status, Fitch Ratings and Standard & Poor¶s said
last month.
Fitch and S&P both rate Romania, the EU¶s second-poorest after Bulgaria, with a BB+, the
highest junk grade. An improvement to investment status, which depends on spending cuts
and implementation of approved wage and pension laws, may not happen this year, analysts at
the two rating companies said.

The budget deficit widened to 7.2 percent of GDP in 2009 before narrowing last year to 6.5
percent of GDP last year, Basescu said.