Last week I wrote about cost and competition. This was partially a reaction to an article in Ziarul Financiar by a professor at the Academy of Economic Studies (ASE) in Bucharest. Not a week later I found an article in ZF by another prof.univ.dr. at ASE, Eduard Dinu.
New Year Wishes
This professor explains how last year he wished for “a functional market economy, based on real competition and not just a formal one” and concludes that, a year later, this has not been realized. You can find the article here. I don’t want to make this a series, but simply couldn’t resist the temptation to comment on some of the statements this professor makes. I do this for two reasons, first – him being a professor at – of all places – ASE and second- the fact that the article was published in Ziarul Financiar. Both impose, in my view, minimum standards in terms of quality that in my opinion have not been met.
To illustrate the lack of competition in the financial system the professor used the “method” of populist politicians. He takes the – variable – interest of a minor player for a certain type of loan and the – fixed – interest for a one year deposit. And concludes that “the spread is almost 8 TIMES!!!” Besides the fact that interest spreads are as a rule expressed as a percentage, this is not very scientific. He fails to explain, if there is no competition, why this bank (or the system as a whole) doesn’t make a profit. In reality it is very easy to calculate the interest margin for a bank or the banking system. A student can do it in a few minutes. Interest bearing assets and interest bearing liabilities as well as interest income and interest expense can easily be found in annual reports and other sources that are at the disposal of a professor at ASE. A simple calculation et voila, the interest margin for the Romanian banking system. Apparently this was too much work, or the outcome was not to the liking of the professor.
A tip for the professor, look for a bank with a product that offers zero interest for credit balances, your “spread” becomes infinite.
Stop Export Of Profits
Another interesting point is his “dream to stop or at least limit the export of profit realized by multinationals in Romania to their parent companies“. I would have thought that the freedom of repatriating profits is a fundamental part of a functional market economy, exactly the professor’s wish but he sees things apparently differently. What does he dream about? Should Romania leave the EU, or is he dreaming about changing the Acquis Communautaire of the EU. Surely the ASE university professor knows that repatriation of profit is unlimited within the EU and outside the EU often covered by bilateral treaties.
Why should an investor who made a profitable investment not be allowed to take the profit, over which he paid taxes, out of the country. People invest their money in order to make a profit, if they cannot use the profit as they deem fit, why invest? What foreign investor would invest in Romania or any other country if they were not allowed to take out their profit, professor ? Nobody! Is that in the interest of the country?
A Loan Is Not Repatriation
More delicate is that the example given by our ASE professor doesn’t even seem to be about profit repatriation. He talks about a loan of 25 million EUR that the subsidiary of a Romanian company has given to it parent in France at preferential rates. How can a loan be repatriation? I am sure there are students at ASE that can explain the difference. It is absolutely normal for multinational companies to have a centralized treasury and centralized cash management.
Preferential Pricing ?
It becomes really embarrassing when the professor expresses his opinion that this 25 million EURO loan by the Romanian subsidiary is given to the French parent at “costuri absolut preferentiale” (no translation needed). He mentions a cost of ROBOR minus 0,15% for a 25 million EURO loan. ROBOR over that last year being about 5,5 % this leads to an interest rate of 5,35% ! If this can be called preferential, it is so for the Romanian subsidiary and not for the French parent! The local shareholders should be happy because the company would not get the same rate from a Romanian bank. Maybe the professor doesn’t understand the difference between ROBOR and EURIBOR ?
Is it really too much to ask to maintain some minimum standards when writing for the leading financial newspaper in Romania? This should be the platform for real discussion and debate. Based on facts, please. Don’t insult the intelligence of your readers. If I set my standards too high, let me know.
In the meantime I saw that Misu Negritoiu, CEO of ING and former professor at ASE himself, also reacted on the same article. Recommended reading here.