Financial crisis and political marketing on the Romanian money market in 2008.

David, Oana ; Osiceanu, Sanda ; Militaru, Gheorghe 等

1. INTRODUCTION

Right after the housing prices had plummeted and the top financial institutions--holders of mortgage assets--tumbled, the main financiers and politicians in the USA, followed by their counterparts in Europe and the rest of the world, hurried to flood the money market with cash. They recapitalized, at any cost, the financial institutions that were on the brink of bankruptcy. The reason was that the lack of such measures would have brought about a drastic reduction of the credit, a deflation even, causing a deep and long downturn for the American economy and the entire world, as it had already happened in 1929, the first year of the Great Depression.

Loan granting represents an active function for banks; the consumer loans and real estate acquisition loans had greatly extended in the previous years, boosted by the countries' money policies in. This is the reason why the emergence of the financial crisis has led to an unfavorable situation in the monetary system and, ultimately, in the entire economy.

In terms of the financial crisis, the most detailed findings are to be found in those countries where the crisis started sooner, for instance the United States of America, where it actually originated. The paper will attempt to present the effects upon the banking system in our country of the financial crisis in Romania in the year 2008, where most banks were owned by European financial corporations who had been affected by the crisis before it got manifest in Romania.

2. THE ORIGINS OF THE WORLDWIDE FINANCIAL CRISIS

The roots of the present financial crisis are placed in the monetary policy of the United States of America (Federal Reserve) after the year of 2001, as a reply to the IT crisis at the end of the 90s and the downturn related fears following 9/11. The steep monetary policy interest decrease (federal funds rate) from 3.5% in August 2001 to 1% in June 2003 and its maintenance at this level for one year period was the main cause for the boost of the real estate loan, for the financing of high risk debtors (sub-premiums) and, in the end, for the current financial crisis.

The additional credit generated by Fed interfering into the inter-banks market was mainly focused on the acquisition and building of new houses. The surging demand for houses triggered a significant growth of prices in the real estate sector. Hence, the consolidation of the mortgage loans, as the banks and financial institutions felt protected by the upward prices evolution on the real estate market, while the debtors became unable to pay their installments in due time.

At the end of the year 2006, the housing prices started going down, while the number of debtors unable to pay their mortgages went up, at the same time with the accretion of Fed key interest. Shortly after that, a liquidity crisis followed, which passed onto the entire financial sector, as a chain reaction.

On the other hand, Alan Greenspan, who between August 11, 1987 and January 31, 2006 was the chairman of the US Federal Reserve, (Greenspan, 2007) thinks that the emergence of the crisis was not grounded by monetary reasons. Thanks to the low interest rates between 2001 and 2006, the real estate sector boosted. In his opinion, the financial crisis was the direct outcome of some errors that had distorted the investment decisions and plans within the financial community, generating a chain reaction. And this error itself was based on the optimism that occurs during economic stability and growth (Greenspan, 2008).

The critics of Greenspan say that the investment imbalances at the micro-economic level cannot be separated from the monetary policy decisions that he made while managing the Federal Reserve. The drastic decrease of the interest nominal rate for this interval of time generated a situation where the investment errors in the real estate sector accumulated, encouraging a great volume of high-risk collateral loans.

Anna Schwartz, an economist at the National Bureau of Economic Research in New York, states that the main issue is actually the high degree of uncertainty in the financial sector. As the real estate market is still frangible, the value of the mortgage assets owned by various financial institutions cannot be correctly assessed, and therefore, the banks are not sure of the solvency capacities of their business partners, hence the high interest rates.

Anna Schwartz suggests that these rates include a significant uncertainty level and that in the current conditions such does not reflect at all a dropping off or a restriction of loans (Schwartz, 2007). She says that Ben Bernanke, the current chairman of the Federal Reserve, acts as if he had in hands a contraction of the monetary mass, as it happened during the Great Depression. Both his expansionist monetary policy and the decision to purchase shares at the main banks contribute to the crisis deepening. Salvaging the distressed banks from bankruptcy does nothing but to hinder the reevaluation of the price for the nonperforming mortgage assets, to keep almost bankrupt financial organizations alive, and thus to extend the crisis period.

A new study has been drawn up by three economists employed with the Federal Reserve branch in Minneapolis (V.V. Chari, Lawrence Christiano and Patrick J. Kehoe) in regards to the credit availability in various sectors of the American economy. The finding of the study is that the credit level has remained the same, even slightly increased since the financial crisis onset, both for the consumer and corporate loans and for the inter-bank loans or the ones attracted by corporate bonds.

In spite of the worries of Fed, which has opened an unlimited credit line for such tools, the interests for the companies' bonds also confine within the historical average limits. Similarly, 80% of the non-financial corporate financing are attracted by funds outside the banking system; hence, the upheaval in the financial sector may not affect, but superficially, the real economy sector. As the Fed statistics admit, the deposits of the American banks have risen at the end of the year 2008.

3. THE STATE OF THE ROMANIAN MONETARY MARKET AND MARKETING POLICY IN 2008

The emergence of the financial crisis in Romania has brought some risks in the bank loans, credit and insurance system, that the Romanian clients should be made aware of. Of all these, we mention the following: the total credit cost and its clauses, door-to-door consumer loans, discretionary changes of the interest rate, as well as the bank deposits, which represent a new investment alternative.

The main goal that should be pursued by the person wanting to get a bank credit is the effective yearly interest, which is the total credit cost to the consumer. An efficient method to avoid the "hidden costs" is to peruse all the clauses in the credit contract (Stroe & Armeanu, 2004).

To elude such a situation, it is essential to request for a credit simulation and for a copy of the contract draft. Then, a careful examination is necessary, mainly of the contractual clauses regarding the interest value, the charges and the other costs, the effective yearly interest rate value, and the penalty interest rates.

Failure to reimburse in due time the loan, the interests and other afferent costs entail the registration of the debtor as with the Office for Credits, which makes it difficult or even impossible for that debtor to obtain other loans for a certain period of time. The credit contracts, should stipulate the method of interest calculation, upon expiry of the fixed interest period, even though some banks rather stipulate the indicators based on which the interest is to be calculated in the future, without providing the exact calculation method.

Granting door-to-door consumer loans is only allowed to non-banking financial institutions (NBFI), the activity of which is regulated by in force legal norms, to the extent that they fulfill the general legal requirements and are registered in the General Ledger held by the National Bank of Romania (NBR).

The unilateral amendment by the bank of the credit costs, of which most times the client becomes aware when such amendment is published on the bank's site or posted at the branch offices, entitle the customer to either agree with the changes or terminate the contract; for the latter case, the consumer is obligated to reimburse the bank with all the amounts that are due under the contract (due capital, interests and bank charges).

Increasingly attractive offers appear on the banking market, promoting higher interest rates, both for RON and foreign currency deposits, as well as the down payment to the deposits.

The foremost concern of the banks is the increased prudence for their internal resources, so that they now think twice before granting financing. The credit brokers say that the banks take a much longer time to give approval for the credit files, since they look at three factors within new trend: the latest NBR norms, the stoppage on the real estate market and the financial crisis. The first measure that the banks have taken was to substantially accrue the loan interests, as they rose by more than 2% in October 2008 in the case of EUR financing.

The banks have attempted to limit the share of Swiss Francs credits--of high currency risk--especially following a strong depreciation of the Romanian leu. The credit institutions have also acted upon high value loans, mortgage-guaranteed, while the value of the older apartments has gone speedily downwards towards the end of the year 2008, and is still doing so (Daianu, 2008). The banks are more careful now when evaluating real estate properties, since the risk margin is larger, especially in the case of older buildings.

Due to the crisis of euro liquidities, the NBR norms that dissuade the granting of loans in foreign currency, as well as to the high fickleness of the currency rate, the analysts have ascertained that the credit applicants favor the loans in RON and fixed interests, where possible.

The difference between the interest of a credit in RON and the one in EUR has been significantly diminished recently: the interests in RON have constantly decreased, as a consequence of the competition on the banking market, even if NBR increased the monetary policy interest, while the interests of loans in EUR have increased, following a noteworthy rise of the refinancing costs of international banks.

According to the NBR statistics, the average interest for the mortgage loans in RON was of 10.5% in July 2008, down with two points compared to the same month in 2007. At the same time, the average interest for the EUR loans is rising, reaching 8% and even up with 1-2 percent in the last months, for most banks, with the possibility of even exceeding the one in RON.

The consumer loans, especially those in foreign currency, will be further affected in 2009, mainly because of the restrictions imposed by NBR. On the other hand, though, the banks will try out other credit products, such as credit cards and loans in RON. The restrictions of the central bank do not apply to credit cards, which involve a lower risk degree for the banks, and also are more flexible for the clients. Banks are likely to obtain important profits from credit cards, as higher interests are charged for a credit card than for a usual loan.

4. CONCLUSION

Right after the housing prices had plummeted and the top financial institutions--holders of mortgage assets--tumbled, the main financiers and politicians in the USA, followed by their counterparts in Europe and the rest of the world, hurried to flood the money market with cash.

They recapitalized, at any cost, the financial institutions that were on the brink of bankruptcy. The reason was that the lack of such measures would have brought about a drastic reduction of the credit, a deflation even, causing a deep and long downturn for the American economy and the entire world into, as it had already happened in 1929, the year of the Great Depression.

In Romania, in the year of 2008, the average interest charged by the banks for the overdraft credit in RON, by means of a credit or debit card, dropped by 2% to 20% per annum, according to the data released by NBR. In comparison, the average interest for a consumer loan in RON is of 15% per annum, while for a housing loan it is of 10%. Furthermore, the credit cards bring in additional income for the banks by the fees charged for cash withdrawal and for account administration.

5. REFERENCES

Greenspan, A. (2007). The Age of Turbulence, Penguin Press, ISBN 1-5942-0131-5, New York

Greenspan, A. (2008). We will never have a perfect risk model, The Financial Times, 17 March 2008

Schwartz, A. (2007). Bernanke Is Fighting the Last War, The Wall Street Journal

Daianu, D. (2008). International financial crisis: we need strict rules on financial market, The "Financiar" Paper, 14 January 2008

Stroe, R.; Armeanu, D. (2004). Finance, Second Edition, Editor ASE, ISBN 973-5943-72-7, Bucharest