Presentation at MACRO 2015 Conference
Fostering economic and social security amid insecure times
The independent Moldovan think tank Expert-Grup and Friedrich Ebert Stiftung jointly hosted the annual MACRO 2015 Conference on economic and social security in Moldova. GET Moldova’s project manager Jörg Radeke was invited to hold a presentation on “How to avoid the banking crisis turning into a social system crisis”.
This year’s conference was dedicated to the current fraud in Moldova’s banking sector, namely the “loss” of 1 billion USD (or 15% of Moldova’s GDP) earlier this year and its consequences for the Moldovan economy and social security system. It is important to understand that the money disappeared due to intransparent lending activities made possible due by the weak banking oversight in Moldova.
In a first panel, economists from the National Bank of Moldova, the IMF and other experts discussed financial and economic security and how to restore banking resilience, currency stability and economic growth in Moldova.
In a second panel on the topic of “Challenges to social security and how to avoid the economic crisis turning into a social crisis”, Radeke presented the group’s view on Moldova’s economic policy and actions required.
“The bank fraud significantly impacts on Moldova’s economy, namely public debt and public finances”, Radeke opened his presentation: “The questions we need to address concern the bank fraud’s effect on social security systems and how the government should react to it”.
It is crucial to clean up the banking sector before we even start to talk about social reforms. The government faces two main options in dealing with the bank fraud, both of them pose significant costs somewhere in the range of 0.5 – 1 bn USD.
The first option is to liquidate banks so they cannot be used for fraud anymore. This is however only possible if the bank is not relevant for the stability or the functioning of the whole sector, and it would be necessary to compensate depositors.
The second option is to recapitalize the banks with additional money from state funds. Once the bank recovered, this solution provides the chance to recover the capital as well, so that money wouldn’t be lost in the long run. However, a risk for continuing fraudulent loans remains.
No matter what the government decides to do in the end, the costs caused by the bank fraud are likely to be substantial. Public debt levels are likely to rise sharply as recovery needs to be financed. This leads to additional costs to the state budget from the interest payments caused by public debt. At the moment, interest rates for government debts are between 15 – 20%, implying additional interest costs of 75 – 150 million USD or 5 -10 % of the current budget expenditure. Hence, in order to finance the costs of the bank fraud, the government needs to either reduce state expenditures or increase revenues by 10%. This is likely to reduce substantially its ability to pay for the social security system.
In addition there is the risk that Moldova’s international partners reduce their financial assistance. With grants worth almost 3% of GDP recieved in 2014 this is a large source of income for the state budget. Thus reduced support from international donors could render Moldova’s public finances utterly unsustainable.
Consequently, the only solution of the banking fraud is cooperation with international donors. However, international donors are unwilling to offer this assistance if there are no guarantees for money to not “disappear” again.
Presentation: “Economic impact of Moldova’s banking fraud: Banking crisis – economic crisis – social system crisis?”
You can find more information about the event and presentations of more panelists here