05BUCHAREST1205 / 2005-05-25 13:30:00
Embassy Bucharest
                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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