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Cablegate: Romania Plans to Use the Capital Markets to Pay

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BUCHAREST 001205

SIPDIS

STATE FOR EUR/NCE - WSILKWORTH, EB/IFD
STATE PASS USTR
USTR FOR LERRION
TREASURY FOR STUART
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL
STATE PASS USAID

SENSITIVE

E.O. 12958: N/A
TAGS: ECON PGOV ETRD EIND EFIN RO
SUBJECT: ROMANIA PLANS TO USE THE CAPITAL MARKETS TO PAY
PROPERTY RESTITUTION CLAIMS


1. (U) SUMMARY: The Tariceanu Government has proposed the
creation of a real estate investment fund as a novel way of
addressing the property restitution issue without drawing
from government funds. By unlocking the value of static
state holdings through transfer to a publicly traded fund,
the GOR will in effect compensate claimants without
impacting the budget. The GOR plans to select a financial
firm by November first, preferably one with Wall Street
expertise, to manage the fund and to secure its listing on a
European exchange. The proposal is in response to
increasing calls by the IMF for fiscal prudence and growing
pressure from former property owners to settle their claims
equitably. END SUMMARY

COMPENSATING OWNERS WHILE AVOIDING A BUDGET CRUNCH
--------------------------------------------- ------
2. (SBU) On May 16 Econoffs met with the fund's creator,
Secretary of State Nicolae Ivan, who described the property

SIPDIS
fund as a way to simplify owner compensation in the face of
a tight budget which constrains borrowing. He stated that
the GOR plans to submit draft legislation on the project to
the Parliament for consideration in early June. The fund
will be composed of real estate holdings, foreign
receivables and shares of state-owned companies, the
composition of which will be determined by the GOR. The
State Privatization Agency (AVAS) has stated that it will
exclude non-viable companies from the list.

3. (SBU) The fund will be used to compensate those whose
property was confiscated by the Romanian state during
Communism. The fund will not be used, however, to settle
property disputes between the Greek Catholic and Orthodox
churches. Although the GOR's stated preference is for
original owners to reacquire their real estate assets if at
all possible, in reality this has infrequently occurred,
usually when owners have taken the GOR to court.
Nevertheless, Ivan emphasized that by law a current tenant
of confiscated property must vacate the location within a
specified time period. Only if the property has been
destroyed, no longer exists, or is otherwise impossible to
return will the equity fund compensate a former owner.
Local authorities will make the first determination whether
or not a claimant has the right for compensation through the
fund. If the authority disagrees with the claim, the former
property owner may opt to appear before a judge to argue the
case. An original owner has the right to compensation by
the fund in an amount equivalent to the property's estimated
value.

AMBITIOUS PLAN TO BRING FUND TO MARKET
--------------------------------------
4. (SBU) The GOR plans to transfer property from state
entities into the property fund within thirty days of the
law's passage in Parliament. The GOR intends to hire, no
later than August, a law firm with international expertise
to conduct a tender offer for a fund manager. Ivan's plan
involves selecting a manager by November first, and signing
a binding contract with the selected firm no later than
January 1, 2006. The GOR's goal is to float the fund on
both the Bucharest and a yet-to-be-determined European
exchange within one hundred days of contract execution.
Ivan emphasized that transparency in the fund's operation is
critically important and that he privately hopes that an
American firm will be awarded the contract.

5. (SBU) The funds' total value will be equivalent to the
value of outstanding property claims, currently $4.5
billion, with fixed assets, such as land and forests, to be
listed at book value. The GOR would tap an independent
expert to conservatively value state-owned companies; Ivan
expects valuations for these assets to be at or close to
book value. As claims are added, the total book value of
the fund will similarly increase as the GOR adds property
equivalent to the revised value. Shareholders will have the
right to immediately cash out of the fund upon its launch,
or may opt to hold their shares for sale at a later date.
Claimants will have until January 1, 2007 to request
compensation from the fund. The fund will terminate at the
ten-year mark, and properties will be liquidated at that
time.

6. (SBU) Secretary Of State Ivan asked Post for assistance
in spreading the word about the fund's upcoming tender to
interested parties, while stating his preference for Wall-
Street firms with experience in real estate fund management.
Ivan hopes to interview with financial publications, such as
the Wall Street Journal, that will reach his target
audience. Econoffs promised to raise this with Public
Diplomacy. Ivan hopes that Romanians will view the fund as
a safe place to invest money for retirement.

Comment
-------
7. (SBU) Post believes that the fund represents a creative
means of compensating former property owners through
available resources without damaging the budget. Many
questions, however, remain unanswered, including which
assets will be transferred into the fund, how the portfolio
will be valued, and how claimants, most of them elderly,
will receive information on how to convert shares into cash.
Press reports about the program have been skeptical,
possibly due to memories of the unsuccessful mass
privatization program which occurred in the early 1990's.
That program was criticized for its lack of transparency and
absence of an education campaign to inform shareholders of
their investment options and rights. In order to avoid a
repeat of past mistakes, the GOR will need to compensate
claimants in a transparent and equitable manner, while
dispersing necessary investor information and education to
shareholders. Although AVAS has announced that nonviable
companies will be excluded from the portfolio, Post will
closely monitor the fund's composition to ensure that it
does not become a "dumping ground" for low quality assets.
Delare

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