The politics of banking in Romania: Soft loans, looting and cardboard billionaires

Government and Opposition

Volumn 39, Issue 3, 2004, Pages

  Cernat, Lucian ^a  

^a United Nations Conference on Trade and Development   (Switzerland)

Author keywords

[No Author keywords available]

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EID: 3042756168     PISSN: 0017257X     EISSN: None     Source Type: Journal    
DOI: 10.1111/j.1477-7053.2004.00130.x     Document Type: Review

References (41)

1. J. Elster, C. Offe and U. K. Preuss, Institutional Design in Post-Communist Societies: Rebuilding the Ship at Sea, Cambridge, Cambridge University Press, 1998.
2. L. Cernat, and R. Vranceanu, 'Globalization and Development: New Evidence from Eastern Europe', Comparative Economic Studies, 44: 4 (2002), pp. 119-36.
3. C. Poirot, 'Macroeconomic Stabilization in an Uncertain Environment: the Case of Romania', Journal of Economic Issues, 30: 4 (1996), pp. 1057-75; G. A. Calvo and F. Coricelli, 'Output Collapse in Eastern Europe: The Role of Credit', IMF Staff Papers, 40: 1 (1992).
4. C. Poirot, 'Macroeconomic Stabilization in an Uncertain Environment: the Case of Romania', Journal of Economic Issues, 30: 4 (1996), pp. 1057-75; G. A. Calvo and F. Coricelli, 'Output Collapse in Eastern Europe: The Role of Credit', IMF Staff Papers, 40: 1 (1992).
5. According to the World Bank, there have only been three examples of unqualified bank restructuring success among CEECs: Estonia, Latvia and Slovenia. See P. Siegelbaum, 'Financial Sector Reform in the Transition Economies: What Have We Learned; What Are the Next Steps?', speech delivered at the 2nd Annual Conference on Bank Credit in Central and Eastern Europe, sponsored by the International Industry Conferences On Bank Credit Risk, IBC UK Conferences Limited, Prague, 2 September 1997.
6. Economist Intelligence Unit, Country Forecast: Romania, London, Economist Intelligence Unit, December 2002.
7. A. Demirgüç-Kunt, R. Levine and H. G. Min, 'Opening to Foreign Banks: Issues of Stability, Efficiency, and Growth', Proceedings Bank of Korea Conference on the Implications of Globalization of World Financial Markets, Seoul, Bank of Korea, 1998, pp. 83-105.
8. National Bank of Romania, Comunicate de Presa, Bucharest, National Bank of Romania, 2001.
9. For a good discussion on the debate about financial repression, as well as a comparative discussion of financial systems, see for instance R. I. McKinnon, Money and Capital in Economic Development, Washington, Brookings Institution, 1973; J. Fry, Money, Interest and Banking in Economic Development, Baltimore, Johns Hopkins University Press, 1988; S. Haggard, C. H. Lee and S. Maxfield (eds), The Politics of Finance in Developing Countries, Ithaca, NY, Cornell University Press, 1993.
10. For a good discussion on the debate about financial repression, as well as a comparative discussion of financial systems, see for instance R. I. McKinnon, Money and Capital in Economic Development, Washington, Brookings Institution, 1973; J. Fry, Money, Interest and Banking in Economic Development, Baltimore, Johns Hopkins University Press, 1988; S. Haggard, C. H. Lee and S. Maxfield (eds), The Politics of Finance in Developing Countries, Ithaca, NY, Cornell University Press, 1993.
11. For a good discussion on the debate about financial repression, as well as a comparative discussion of financial systems, see for instance R. I. McKinnon, Money and Capital in Economic Development, Washington, Brookings Institution, 1973; J. Fry, Money, Interest and Banking in Economic Development, Baltimore, Johns Hopkins University Press, 1988; S. Haggard, C. H. Lee and S. Maxfield (eds), The Politics of Finance in Developing Countries, Ithaca, NY, Cornell University Press, 1993.
12. Economist Intelligence Unit, Country Forecast, op. cit., p. 25.
13. A closer look at monthly nominal interest rate data revealed a large fluctuation from one month to another, with interest spreads as high as 40 per cent.
14. T. Hellman, K. Murdock and J. Stiglitz, 'Financial Restraint: Towards A New Paradigm', paper written for the World Bank EDI Workshop on the Roles of Government in East Asian Economies: Rent Creation, Coordination and Institutional Development, Stanford University, 10-11 February 1995.
15. Hellman et al. 'Financial Restraint', op. cit., stress that, for financial restraint policies to create such positive effects, a number of conditions must be present, including a stable, low-inflation macroeconomic environment, non-excessive taxation of the financial sector, and positive real interest rates.
16. There is a large volume of theoretical and empirical literature on identifying the causes and channels of soft budgets. The theoretical literature is summarized in J. Kornai, 'The Place of the Soft Budget Constraint Syndrome in Economic Theory', Journal of Comparative Economics, 26: 1 (1998), pp. 11-17. Empirical studies include J. P. Bonin and M. E. Schaffer, 'Banks, Firms, Bad Debts and Bankruptcy in Hungary 1991-94', Centre for Economic Performance Discussion Paper 234, London, London School of Economics, 1995, on Hungary; S. Claessens and P. R. Kyle, Jr., 'State Enterprise Performance and Soft Budget Constraints: the Case of Bulgaria', Economics of Transition, 5: 2, pp. 305-22, on Bulgaria; E. Perotti and O. Carare, 'The Evolution of Bank Credit Quality in Transition; Theory and Evidence from Romania', CERT Discussion Paper, 2, Edinburgh, Centre for Economic Reform and Transformation, 1997, on Romania.
17. There is a large volume of theoretical and empirical literature on identifying the causes and channels of soft budgets. The theoretical literature is summarized in J. Kornai, 'The Place of the Soft Budget Constraint Syndrome in Economic Theory', Journal of Comparative Economics, 26: 1 (1998), pp. 11-17. Empirical studies include J. P. Bonin and M. E. Schaffer, 'Banks, Firms, Bad Debts and Bankruptcy in Hungary 1991-94', Centre for Economic Performance Discussion Paper 234, London, London School of Economics, 1995, on Hungary; S. Claessens and P. R. Kyle, Jr., 'State Enterprise Performance and Soft Budget Constraints: the Case of Bulgaria', Economics of Transition, 5: 2, pp. 305-22, on Bulgaria; E. Perotti and O. Carare, 'The Evolution of Bank Credit Quality in Transition; Theory and Evidence from Romania', CERT Discussion Paper, 2, Edinburgh, Centre for Economic Reform and Transformation, 1997, on Romania.
18. There is a large volume of theoretical and empirical literature on identifying the causes and channels of soft budgets. The theoretical literature is summarized in J. Kornai, 'The Place of the Soft Budget Constraint Syndrome in Economic Theory', Journal of Comparative Economics, 26: 1 (1998), pp. 11-17. Empirical studies include J. P. Bonin and M. E. Schaffer, 'Banks, Firms, Bad Debts and Bankruptcy in Hungary 1991-94', Centre for Economic Performance Discussion Paper 234, London, London School of Economics, 1995, on Hungary; S. Claessens and P. R. Kyle, Jr., 'State Enterprise Performance and Soft Budget Constraints: the Case of Bulgaria', Economics of Transition, 5: 2, pp. 305-22, on Bulgaria; E. Perotti and O. Carare, 'The Evolution of Bank Credit Quality in Transition; Theory and Evidence from Romania', CERT Discussion Paper, 2, Edinburgh, Centre for Economic Reform and Transformation, 1997, on Romania.
19. There is a large volume of theoretical and empirical literature on identifying the causes and channels of soft budgets. The theoretical literature is summarized in J. Kornai, 'The Place of the Soft Budget Constraint Syndrome in Economic Theory', Journal of Comparative Economics, 26: 1 (1998), pp. 11-17. Empirical studies include J. P. Bonin and M. E. Schaffer, 'Banks, Firms, Bad Debts and Bankruptcy in Hungary 1991-94', Centre for Economic Performance Discussion Paper 234, London, London School of Economics, 1995, on Hungary; S. Claessens and P. R. Kyle, Jr., 'State Enterprise Performance and Soft Budget Constraints: the Case of Bulgaria', Economics of Transition, 5: 2, pp. 305-22, on Bulgaria; E. Perotti and O. Carare, 'The Evolution of Bank Credit Quality in Transition; Theory and Evidence from Romania', CERT Discussion Paper, 2, Edinburgh, Centre for Economic Reform and Transformation, 1997, on Romania.
20. M. S. Borish, W. Ding and M. Noël, On the Road to EU Accession. Financial Sector Development in Central Europe, Washington, DC, World Bank, 1996; R. W. Anderson and C. Kegels, Transitional Banking: Financial Development of Central and Eastern Europe, Oxford, Clarendon Press, 1998.
21. M. S. Borish, W. Ding and M. Noël, On the Road to EU Accession. Financial Sector Development in Central Europe, Washington, DC, World Bank, 1996; R. W. Anderson and C. Kegels, Transitional Banking: Financial Development of Central and Eastern Europe, Oxford, Clarendon Press, 1998.
22. A. Amsden, Asia's Next Giant: South Korea and Late Industrialization, New York, Oxford University Press, 1989.
23. ETEBA, Romania: Weekly Bulletin, Bucharest, ETEBA Romania, 16-22 March 2002, p. 1.
24. Economist Intelligence Unit, Country Forecast, op. cit.
25. G. Akerlof and P. Romer, 'Looting: the Economic Underworld of Bankruptcy for Profit', Brookings Papers on Economic Activity, 2 (1993), pp. 1-73.
26. 'Stiri politice', Ziarul Expres, 17 September 1997. Available online at http://wvw.Expres.ro/arhive.
27. Ibid., 29 July 1996.
28. This rule stipulated that a company was allowed to keep all its accounts with one bank only. This regulation was supposed to provide banks with leverage on those companies inclined to avoid payment of their loans by allowing the bank to freeze all the other accounts held by that company.
29. For a typical example of this situation, see for instance the Romanian Constitutional Court's Decision no. 101, Bucharest, Monitorul Oficial, 9 July 1998.
30. The information on Banca Agricola is based on several press reports and confidential interviews with experts from the Governmental Accounting Office, Bucharest, Spring 2001.
31. For further details on the overall amount covered by public funds in the Banca Agricola case, see the special report on bank frauds in Cotidianul, Bucharest, 6 April 2000 and Jurnalul National, Bucharest, 24 October 2000.
32. For further details on the overall amount covered by public funds in the Banca Agricola case, see the special report on bank frauds in Cotidianul, Bucharest, 6 April 2000 and Jurnalul National, Bucharest, 24 October 2000.
33. Petre Roman and Ion Iliescu were clearly rivals for power within the National Salvation Front; furthermore, they held divergent views of the best way forward in reforming the economy. As a result, it was not long before the party split into two warring camps led by the two former political allies. Eventually these two wings of the party evolved into separate parties. Ion Iliescu remained at the top of the Party of Social Democracy of Romania (PDSR) and Petre Roman became the leader of the Social Democratic Party (renamed subsequently the Democratic Party). The Democratic Party forged an alliance with other opposition parties against Iliescu's party and became part of the CDR-led coalition government during 1996-2000.
34. A cardboard billionaire is typically a close friend or relative of a well-positioned politician. Usually, he or she has little, if any, previous experience in the business sector, or even worse, may have a track record of defaulting on bank loans.
35. See R. Tudor, 'Guvernul a aprobat stingerea datoriei Petrom catre AVAB', Cotidianul, 7 June 1999. Available online from http://www.cotidianul.ro (accessed 16 April 2001).
36. T. Papahagi, 'Semnarea acordului stand-by se amana', Cotidianul, 22 June 1999. Available from: http://www.cotidianul.ro/anterioare/1999/economic/ (accessed 4 June 2000).
37. I. Serbanescu, 'BANCOREX - istoria emblematica a Romaniei postdecembriste', Revista 22, 38 (1999).
38. E. O. Chirovici, 'Florin Ionescu a trecut, problemele BANCOREX au ramas', Curierul National, 2179, 11 May 1998.
39. 'Central Banker of the Year', The Banker, 911 (January 2002).
40. Serbanescu, 'BANCOREX - istoria emblematica', op. cit.
41. The press has consistently presented cases of corruption and dubious privatization deals that benefited the political clientele of the ruling coalition not only during the early 1990s but also during the 1996-2000 period of CDR-led coalition government (see for instance the privatization of Romtelecom, the national telecom operator).