IMF suspends Romania review, funds delayed /REUTERS

International lenders will hold back funds originally due to be paid to Romania next month, officials said on Friday, after a political crisis prompted the IMF to halt a review of a 20 billion euro bailout package. The International Monetary Fund has told Bucharest it must pass laws including a cost-cutting budget by Dec. 10 or it will postpone a 1.5 billion aid tranche crucial to the European Union member's bid to shore up finances and avert deeper recession. But a political stalemate since the collapse of a centrist government last month, and wrangling between rival parties ahead of a two-stage presidential election looks set to force policymakers to miss that date.

The ballot -- a Nov. 22 first round and a likely Dec. 6 runoff -- is one of Romania's most important votes since the 1989 fall of communism, as the victor will pick the head of the next two governments and influence long-delayed reforms. The IMF's head of mission to Bucharest, Jeffrey Franks, said the Washington-based lender had suspended its review of the package until a new cabinet was formed, which political pundits do not see happening until after a runoff. "We feel we can rapidly conclude our review of the economic situation ... once the political situation is resolved," he said.

He also said Romania had missed a range of targets agreed with international lenders, and that the public sector deficit could reach 7.8 percent of gross domestic product (GDP) this year, above the agreed 7.3 percent goal. He said time was running short for the loan and a solution to the crisis would have to come very soon for the Black Sea state of 22 million people to secure the tranche in December. But if it came later it would be in January. Romanian officials were more pessimistic, and analysts said it was virtually impossible this year. When asked whether he expected the next loan tranche to be delayed, Central bank Governor Mugur Isarescu, said: "Yes, things appear obvious now."

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Financial markets have responded by demanding higher interest on Romanian debt and pushing credit default swaps higher since the crisis started six weeks ago. It now costs $85,000 more to insure $10 million of bonds against default. Romanian CDS prices were down to 280.6 from 281.1 on Thursday's close and the leu currency was little changed on Friday after the comments, although analysts said they suspected the central bank of propping it up with covert intervention. Analysts say the IMF's warning means Bucharest will not meet its demands ahead of a mid-December Fund board meeting and it will get the next loan tranche in January at the earliest. A parallel 1 billion euros in funds from the European Commission, tied to the IMF evaluation, was also seen delayed. "On the EU side ... in terms of disbursement it cannot happen this year," said EC representative Elena Flores. At stake is a 2010 budget aimed at holding the deficit to 5.9 percent of GDP, a goal that would include planned mass layoffs of 150,000 state workers in 2010 and pensions and public pay cuts.

No party is seen endorsing steep cuts ahead of the election, which pits President Traian Basescu against Social Democrat rival Mircea Geoana, and Liberal Crin Antonescu. Even a brief postponement of aid could push Romania into costly domestic borrowing to make up for the shortfall. It can also halt badly needed infrastructure investment and other projects crucial to avoid deepening economic contraction. Although the IMF improved its forecast of how much Romania's economy will shrink in 2009, it still forecast 7.5-8.0 percent. "This is nothing good for Romania," said political analyst Mircea Marian. "The political crisis will continue indefinitely, probably until mid December." Basescu also named a Democrat-Liberal Party ally, Bucharest district Mayor Liviu Negoita, as new prime minister designate. Negoita pledged to come with a proposed coalition on Monday. But he is expected to fail to win favour in the opposition-dominated parliament, which rejected Basescu's previous nominee, party ally Lucian Croitoru, on Wednesday.