Mugur Isărescu: three decades of finding the right balance in Romania

Mugur Isărescu has been governor of central bank the National Bank of Romania (NBR) for almost 30 years – apart from a period as prime minister between 1999 and 2000 - having taken the helm in 1990. After communist dictator Nicolae Ceaușescu was overthrown in December 1989, Mr Isărescu briefly served as an economic and monetary affairs secretary at the Romanian embassy in Washington, before being appointed central bank governor in September 1990. Before that, the now 70-year-old spent close to two decades working at an economics research institute in Bucharest. 

“I was a research fellow at the Institute of World Economy in a communist country. We were supposed to report to the leaders of the Communist Party when capitalism will collapse, and actually we saw how communism collapsed,” says Mr Isărescu.  

Q: What do you remember about your appointment as governor?

A: I was appointed governor when I was in Washington. I was young: 41 years old. I was in the Romanian Embassy and the Fed was just several blocks' walk away, so I went there, knocked on the door and said: ‘Look, I'm going to be the governor of the NBR, what should I do?’ I stayed for several weeks, and then I moved on to the International Monetary Fund [IMF] and said: ‘We are friends, we need assistance.’ I was appointed in the September, and in the October they decided to send a technical team of three experts. 

For a start, we had a team of about 10 to 12 experts from all around western Europe: the Bank of Belgium helping for foreign exchange, Bank of France for accounting, the National Bank of Austria for payment systems, Banca d’Italia for money markets, the Dutch central bank for supervision and regulation. Someone from the Central Bank of Norway discovered that in all this institution we had no PCs, so we got our first PC as a donation from the Norwegian central bank. 

Q: What were the main challenges in those years immediately after the revolution?

A: There were several challenges in those days. But for the financial sector it was mainly the reshaping of the almost half-a-century mono-bank system into a modern two-tier banking model, while restoring the national bank’s role in an economy embarking on a vast and complicated reset process never experienced before, from a centrally planned to a fully fledged market economy.

Of course, all the ex-communist states in the [central and eastern Europe – CEE] region faced the reset challenge but Romania's was coming on the back of a harsh dictatorship. Our peculiarity was that during the 1960s and 1970s, Romania was somehow advantaged – we were the first communist state to join the IMF and the World Bank and we also earned the most-favoured nation status from the US. But during the 1980s, all [that] turned back. 

In the 1980s, Mr Ceaușescu moved towards more centralism, paying off the foreign debt. My first reaction at the time was ‘this is good, it’s an asset’. It proved to be more of a liability. It tightened the belt too much at the expense of living standards. The other liability was on capital markets, because the decision to pay in advance the foreign debt was accompanied by a very aggressive ideology, criticising the creditors. 

The debt repayment drive nearly froze contacts with Western creditors. If [Mr Ceaușescu had] lived another two months, Romania was supposed to leave the IMF. 

Q: How did you go about building a function banking system?

A: The path towards a functional market economy was anything but smooth. With the national bank operating for decades in state planning mode – like the entire Romanian economy – one could find no trace of genuine monetary policy. Even more, commercial banking, almost entirely performed here [at the NBR], had to be separated from the central bank’s traditional activities. 

The first thing we did after we drafted the banking laws was to separate the bank corporations that remained here. Only 5% of personnel remained [at the NBR], and then we filled up with research fellows – young guys. After this, we started to send them to be trained abroad.

For a while we had problems mostly with Romanian bankers; those formed under the mono-bank system were the most critical of our policies. Gradually the foreign banks appeared. They appeared with the good practices, knowledge and capital. The first was a small private Greek bank in 1993, a joint venture with the European Bank for Reconstruction and Development. The second wave was in 1994, with two Dutch banks, followed by the French.

Q: After serving as central bank for nine years, you took over for a year as prime minister. What was your main focus?

A: My entire tenure as prime minister was focused on paving a solid Romanian EU accession, [with] 2007 as an accession date, not 2010 as initially envisaged in European circles. And this was not an easy task. The president at the time told me: ‘Your mandate is to persuade Brussels that Romania is going towards the EU and to try to erase the bad image of Romania.’

Q: What came next?

A: A good period of Romania came after 2000, and not because in those days I was prime minister. If you look to real convergence – gross domestic product [GDP] per capita in purchasing power parity – we moved from 21% to 22% of the European average to 66% today. Hungary moved from 40% to 70%, Bulgaria from 22% to 49%. All of this – as well as inflation moving into single digits, currency re-denomination, growing international reserves and the completion of capital account liberalisation, which made the leu fully convertible in 2006 – was related to having good connections, having a benchmark, having a path into the EU.

Success, though, always has a flip side. From 2004 onwards amid the prospect of the 2007 EU accession, one of the major challenges was dealing with massive inflows – a flood of volatile capital after decades of drought. Somehow that tough challenge made us pioneers in implementing the then-labelled ‘unorthodox measures’, which became part of the today’s macroprudential toolkit.

Q: One year after Romania joined the EU in 2007, the financial crisis hit. How did that affect the country?

A: The 2007/08 crisis hit, though not so instantly for us or elsewhere in Europe compared with the US. It hit us harder as, in our case, it was coupled with a twin-deficit problem we were facing at the time, despite the hefty nearly 9% GDP growth.

Those turbulent times posed fresh challenges for the NBR, as it also did for all our CEE peers. Romania was quite fast to access support from international lenders and that helped to address swiftly our external position to withstand the tide. 

Austerity measures implemented by Romania in the aftermath of the crisis were among the harshest in the region. Those times also tested the solidity of the foreign banks’ capital commitments to the Romanian banking sector, and the response was very good. No penny from state coffers was spent to back up banks operating in Romania, unlike in other countries in Europe and elsewhere. 

Q: Looking back on the past 30 years, are you surprised at where Romania is now?

A: Overall, there has been tremendous progress. At the same time, much needs to be accomplished too, both in the Romanian economy as well as in the banking and financial sector. This institution over time has proved to be such a balancing institution, trying to correct what we could adjust.

Q: Do you think the role of central banks has changed over time?

A: Of course. When I started, there was the idea of an independent central bank with a single mandate: price stability. Gradually, the idea has moved towards central banks looking more towards financial stability. It is a much more expansive role that central banks now have. 

Central banks are more flexible than I thought they could be some 30 years ago. They are ready to address critical issues, such as those posed during the global financial crisis, swiftly co-operating among themselves, as well as the institutions to ensure the fulfilment of their mandates. They have also opened up a lot to the public, being involved in areas pretty much ignored three decades ago, such as financial education. 

Banking has changed a lot, too. Banks face the challenge of digitisation but are also under pressure to be more humble.  

Q: Do you think about stepping back, after almost 30 years in office? 

A: There is a time when a person needs to look at their private life. [But] for now, at the beginning of a new mandate at the NBR’s helm, my focus is on a successful completion, being more interested [in] watchfulness to secure equilibria for the Romanian economy rather than in restfulness.