Mugur Isarescu: Romania’s central figure

THE soaring walls and revolving doors of Romania’s communist-era finance ministry on Bucharest’s Constitution Square expose a deeply rooted instability that hampers one of Europe’s more volatile economies. Portraits of former ministers are displayed around the walls of the ministry’s foyer, their faces looking beyond those doors to the pompous People’s Palace, one of the world’s largest buildings, that dictator Nicolae Ceausescu had built for him before he was toppled during the revolutions that swept eastern Europe in 1989. Ministers must have departed office before their depictions go up here, and on the foyer’s southern panels, it’s getting rather crowded. This side displays Romania’s finance ministers since 1989, since Bucharest embraced democracy, capitalism, the European Union and, by 2019 as envisaged here, the fiscal disciplines demanded of its euro aspirations. When Euromoney visited the ministry in mid-December, near 25 years to the day since Ceausescu fell, there were 20 portraits on the post-1989 side of the building. That’s a new minister every 15 months, a record few other nations can, or would want to beat. By comparison, Romania had just six finance ministers during Ceausescu’s 32 years in power. We were in Bucharest to speak to Romania’s 21st finance minister since 1989, Ioana Petrescu. At 34, Harvard-schooled Petrescu was the youngest incumbent finance minister of an EU state. Appointed with much fanfare because of her youth and apparently impeccable education, she had been in the job since March, promoted by prime minister Victor Ponta from being his economic adviser. When we saw Petrescu late on a snowy Sunday, she seemed somewhat harassed. She had endured weeks of arm-wrestling cabinet colleagues, the World Bank, Brussels and an austerity-insisting IMF, which bailed out Romania in 2009 with a €20 billion package, to produce a budget that was already a month overdue, and that Romanians were impatient for. The starting point was an accounting department, a cashier and a personnel department, that’s all. [The rest], monetary policy, research, supervision, regulation, a payments system, the culture – everything was built Mugur Isarescu Outside, rumours swirled that Petrescu would not be long for the ministry. She told Euromoney she hoped to stay in office until her work is completed. “I’m a technocrat, not a politician,” she said, pointing out “there are serious reforms needed across the economy.” She cited the state’s inefficient domination of key enterprises, a hangover from communist times, as one of many. Few doubt that, but any prospects she might have had to implement them didn’t seem to be helped by the man who appointed her, the PM Ponta who Euromoney had interviewed a few days earlier. When Euromoney asked him about Petrescu’s future, he said he “hoped” his youthful charge would keep her job. His assurance had all the sincerity of a football club owner insisting his win-less team’s manager had the full support of the board. And so it proved. A few days after an unremarkable interview with Petrescu, that southern panel of post-1989 ministerial portraits would get another portrait – hers – as Romania’s 22nd finance minister in 25 years, Darius Valcov, the budget minister, took over. Of course, managing complex capitalism is trickier than communism’s command economy. But neighbouring Bulgaria, which rivals Romania as the EU’s weakest member, has had just 11 finance ministers since it tossed out communism in 1989. The eurozone’s ‘sick man’ Greece, though never part of the former socialist bloc, has had 16 in 25 years – and eight of them since 2008. By contrast, Europe’s undisputed wirtschaftsmeister Germany has seen just five finance ministers in 25 years, only two more than it has had chancellors in that period. In Bucharest, that revealing ministry wall may soon become even more crowded with ex-ministerial portraits. The new minister Valcov is widely seen as an unexceptional member of Ponta’s cabinet, and is not expected to last long in office while Ponta is being squeezed by the country’s new president Klaus Iohannis. Under Romania’s French-style cohabitation system, Ponta’s government is constitutionally in office until 2016. But momentum politics is against Ponta after his presidential bid was soundly defeated by Iohannis in a November poll. Iohannis became Romania’s first ethnic German leader, a victory seen as a comprehensive cut with Romania’s corrupt and cronified politics, its oligarchical tentacles reaching back to the Ceausescu era, mostly via Ponta’s Social Democratic Party. Romania may offer a lucrative career for the country’s portrait artists, but such has been the tortured progress of its transition from communism, the finance ministry’s revolving doors tell a story of chaos, corruption and bungling in this ‘twixt-‘n-tween’ nation at the EU’s southeastern extreme, a tale of myriad missed opportunities to catch up with its more prosperous European partners. Defining figure The political part of Romanian economic policymaking might be in chronic flux, but there’s another side that’s anything but. Since 1990, Romania has had one reassuring constant who the country and its multilateral supporters in Brussels, Frankfurt and Washington repeatedly turn to whenever economic gloom descends – its central bank and its 65 year-old governor Mugur Isarescu. In the absence of effective political leadership on the economy, Isarescu has been a defining figure in securing Romania’s shift to the market. Having stepped into the National Bank of Romania chair less than a year after the revolution, he modestly jokes of “sometimes making it up as we went” in building a functioning central bank from communism’s ashes. “The process was incredibly complex,” he recalls. “No theoretical approach was correct, there was no text book. To build market institutions in one or two years was almost impossible. We started virtually from ground zero.” Romanian governments are not traditionally renowned for their sagacious decision-making. In 1917, against the advice of Bucharest bankers, the government of the day dispatched the nation’s horde of gold, precious stones, art and religious icons – worth billions by today’s valuation – to Moscow for safekeeping and away from the German-led Central Powers of WW1 descending on Romania. Mugur_Isarescu-529 Early on in his reign, Mugur Isarescu established the NBR’s independence from the government to execute policy As every Romanian knows, Moscow has never returned the trove and it’s become a perennially irritating pebble in relations between Romania and Russia. Some historians have opined it has even influenced Romania’s westward tilt to Europe’s embrace, and has become a long-standing ritual of the NBR chairmanship. Any new incumbent has not properly assumed office until he is solemnly handed the dossier of sealed documents proving both claim and contents of the ‘Romanian Treasure.’ Isarescu has been the custodian of that dossier – and of Romania’s modern monetary treasures – since September 1990. Discounting a brief absence in 2000, he is one of the world’s longest-serving incumbent central bank governors. (Sir Kenneth Dwight Venner has run the Caribbean monetary authority amalgam, the Eastern Caribbean Central Bank, since 1988.) In a nation repeatedly disappointed by its politicians and civil servants, scandal-free Isarescu can lay strong claims to being Romania’s most trusted public official. He has been, by considerable measure, the most important decisionmaker involved in the Romanian economy, his job in large part to limit and often repair the effects of ministerial mismanagement during that time. Early on in his reign, he established the NBR’s independence from the government to execute policy. And the continuing chaos at the finance ministry has clearly helped Isarescu do his job and keep the NBR’s professional distance from government, says banking analyst and economist Dragos Cabat. “We can genuinely say we are one of the most independent central banks in the world,” says Cabat. Offered to rank the NBR on an increasing one to 10 scale of independence, Isarescu says “perhaps nine.” He says the Bank of England once ranked international central banks on a 1-100 scale based on the operational scope of functions; the more tasks performed such as supervision, note-issuing and so on the higher the rating. Isarescu’s NBR rated 92. Having so many finance ministers and governments (18) during his term has meant, Cabat explains, that no one minister stays around long enough to get the better of him. “They come and go so frequently,” Cabat says, “I doubt he’d even bother with them if they did call.” But ministers do call, Isarescu says. “Because I am senior and they are junior, they ask to come here.” He smiles. “Now… hmm… when they call, it’s something like that they try to have an interview with me.” Through the 1990s it was different. Isarescu says governments would implore him to attend their cabinet meetings, to ask his advice and for money too. He put a stop to this practice when he became prime minister in 2000. “I made a rule then that the central banker will not be in the cabinet room,” he says. “Never! For ever!” Critics Isarescu is not without his critics. Prominent economic commentator Radu Soviani says some of Isarescu’s ‘misjudgments’ on currency markets have cost Romania billions. Isarescu admits he’s made “a lot” of mistakes during his governorship. Inflation, never an issue in the state-set pricing of the communist era, had been a persistent blot on Isarescu’s record that also took years to break, peaking above 300% through 1993/4. It has been steadily brought down to under 2%, helped in no small part by the rigours set by the European Central Bank. The historically-unstable leu has been tamed, its managed float bringing it in line with preparations for Romania’s anticipated entry to the euro in 2019. “The confidence in the national currency has returned,” he says. “Borrowing in leu now means there is no exchange-rate risk. There is more confidence to invest.” Foreign reserves are just over €32 billion, around six months’ worth of import cover. It’s curious, he adds, that the closer Romania gets to adopting the euro, “the market share of the national currency is getting higher and higher, not lower and lower as perhaps one would expect.” In 2014, according to ING Bank research, the leu depreciated by a minimal 0.5% against the euro, compared to the Polish zloty (off 4%) and the Hungarian forint (off 8%). However, the recent currency gymnastics by the Swiss central bank have spooked markets in Bucharest. It comes a month after the mid-sized Banca Transilvania acquired the local unit of Austria’s Volksbank, which had led a mid-2000s push for low-interest Swiss franc loans in Romania. Those loans are now around double in leu terms. Periodically dubbed the ‘Tiger of Eastern Europe,’ usually after Bucharest adds another confidence-securing club membership such as Nato (2003) and the EU (2007), Romania hit a wall in 2009, when the IMF stepped in with a €20 billion bailout. As the 2008 post-Lehmann crisis gathered globally, Isarescu went on TV in an attempt to explain and calm public anxieties. He told Romanians there was a “psychological” danger of contagion, but there was no actual toxic exposure in the system. Several years on, Isarescu is relieved if not proud that Romania has not needed to bail out any ailing local bank or suffered any big financial scandal, unlike, say, Bulgaria. Today, he claims systemic risk is limited, with the leading six banks comprising as much as 60% of the market, with the biggest, BCR, at around 17%. And all of them, save the state-owned CEC Bank run by Radu Gratian Ghetea, are foreign-controlled, with capital adequacy levels higher than the Basle requirements. It is an irony that a part of society is complaining that there are too many rich [people] and too many poor, and they look back to the old times Mugur Isarescu As austerity has kicked in, so have Romania’s euro membership aspirations been set back, from an initial 2010 to 2012, which then pushed out to 2015. Even that has proved ambitious. With the euro in turmoil, Isarescu says it is better for Romania to stay outside the euro, while still aiming to meet the convergence criteria disciplines. Romania currently meets five of the seven entry criteria, with work still needed on legislative harmony with eurozone states. Romania will also need to spend a few preliminary years on euro trainer-wheels, entering the leu into the euro-fixed exchange rate mechanism, ERM II, something that’s not yet on the near horizon. It’s painstaking going, but prime minister Ponta told Euromoney that euro membership remains a central policy plank of his government, while new president Iohannis is also strongly pro-EU and pro-euro. Isarescu says that while political consensus has been near impossible to obtain in Romania, there is agreement on the euro, he says. The euro, he says, will be a “very profound cultural change” for Romania. Aside from recent euro adoptees Slovakia and Slovenia, he claims that Romania, once the laggard of the enlarged EU’s five post-communist members, “is now the sole EU member which fulfills entry criteria. It’s incredible.” The 2019 entry target is necessary as an “anchor for the economy, to keep the country on track, and a catalyst for further structural reforms,” he adds. Euro membership represents a critical milestone for Romania, as well as for Isarescu. A nationally popular figure – he even has a coffee blend named in his honour – he was urged by many Romanians to bid for the presidency in the November poll but chose instead to accept a sixth five-year term as NBR governor until 2019. He’ll be 70 by then, not only one of the world’s longest-serving governors but also among its oldest. If Romania does qualify for euro membership by 2019, the country’s economic history since 1989 suggests it will be in so small part because of the NBR’s technocratic hand stewarding the national till. As monetary policy is ceded to the European Central Bank, the next five years will likely see Isarescu effectively managing himself out of his long-held job, and Romania from a critical aspect of its economic sovereignty. (Unless policy is dramatically changed at the ECB, euro membership will also mean a reversion for Romanians to unpopular paper banknotes. Romania has been using Australian-style plastic or polymer notes since 1999, an Isarescu innovation.) Sharp contrast Today, as Isarescu surveys the magnificence of his domain on Lipscani Street, the old neo-classical finance ministry in downtown Bucharest, the impression of the NBR is of a calm, self-operating machine, in stark contrast to the turmoil within Romania’s economy ministries. It is also in sharp contrast to the old NBR that Isarescu took over in 1990. In Ceausescu’s time, the NBR functioned as a de facto commercial bank, or at least something that tried to pass for one in what was then a command economy. “There were 6,000 employees,” he recalls. “But the only central bank function it did back then was to print money. There was no monetary policy made here, no supervision, everything was central planning under the control of the finance ministry, and the NBR was like a department where ‘banking’ was simply to send money to the central planners.” Isarescu’s post-revolutionary task was to create a central bank from scratch. First, he hived off the commercial function to become what is today Romania’s biggest private bank, Banca Comerciala Romana, after it was privatised by the state to the World Bank’s International Finance Corporation and the multi-lateral European Bank for Reconstruction and Development and, later, to Austria’s Erste Group of Sparkassen fame. BCR is now part of one of eastern Europe’s biggest banking networks. Further reading Klaus Iohannis_R-large Romania risk falls after surprise election result The BCR separation left Isarescu with an office and an administrative rump of just 500 employees, the bare bones of a central bank. “The starting point was an accounting department, a cashier and a personnel department, that’s all,” he says. The rest, he recalls, “monetary policy, research, supervision, regulation, a payments system, the culture, everything was built. “I had no hesitation to ask the IMF and other central banks to come here and advise,” he says. He hosted delegations from the central banks of France, Italy, Belgium, Austria and the US Federal Reserve. “The Bank of Norway gave us our first personal computer,” he remembers. With Romania among the last of the eastern bloc nations to transition, Isarescu says he had the advantage of being able to examine the experiences in Prague, Warsaw and Budapest to decide what worked, and what didn’t. These were crazy times, he says. Out in the street, Romania’s economy was fast becoming an unregulated free-for-all, particularly its nascent finance sector. “People were opening new banks like they would open a bar,” remembers Raiffeisen Bank Romania’s chief executive Steven van Gronigen. Isarescu plucked bright graduates from economic research institutes and trained them to be bank inspectors, “supervising grumpy old guys from the communist system.” Trained up, some of them would leave to start and join commercial banks. The extent of NBR’s independence from Romania’s near-anarchic politics was also up for debate. This was 1990, Isarescu was getting help from western central banks when, as he recalls, “the only real independent central banks back then were the Bundesbank and the Fed.” He recalls a fateful occasion in 1990 at the annual gabfest the Kansas City division of the Federal Reserve Bank hosts at Jackson Hole in Wyoming. The hot symposium topic of the day was central banking in the ‘new’ eastern Europe, and Romania was represented by Decebal Urdea, who’d been NBR chairman in Ceausescu’s last year and had somehow survived the transition. Urdea was a rusted-on party hack, a member of Ceausescu’s central committee. He also couldn’t speak English so he outsourced his presentation at the conference to an economist-translator temporarily stationed in Bucharest’s embassy in Washington to learn Western central banking: Mugur Isarescu. Soon, Urdea was out and Isarescu would return home to Bucharest to implement the plans he’d proffered in Wyoming. Carte blanche In the revolutionary atmosphere of the time, Isarescu was given carte blanche to create the type of central bank he wanted. “I said the Bundesbank, it was an inspiration.” It was the right call. By 1992, the then European Community’s Maastricht treaty mandated that the central bank of member states must be independent. That mandate was translated into Romanian to become law, one of the first post-1989 occasions where Bucharest was aligning its statutes with the emerging European Union. Though the Bundesbank was Isarescu’s general working model, sometimes critical decisions were made on the hoof. Isarescu had the option of keeping bank supervision outside the NBR purview, as it was at the Bundesbank. It was decided the NBR would retain a supervisory role, for the simple reason that there weren’t suitable offices at the time to house any such body. He laughs, as if he’s unburdening himself of a long-held secret. “It was simply that. It’s good to be able to say this after 25 years.” Corruption remains a persistent sore, which he says appeared in “an avalanche of crooks in the 1990s”. It’s a problem of culture, “perhaps related to our historical tradition close to the Orient” and of “perseverance to maintain the independence of the justice system.” He believes euro entry could help reduce corruption on cultural grounds, that its embrace by Romanians, who polls say are about 70% in favour of adoption, is seen a modernising device, “to encourage good entrepreneurship.” Isarescu has travelled a remarkable journey. He graduated as a Marxist economist in 1971, then worked for years at the Institute of International Economics, the country’s only body that tracked economic developments in the west, informing superiors negotiating the terms of what minimal external trade Romania had beyond the Comecon group. His loyalty to the state assumed, he had privileged access to different publications and influences forbidden to other Romanians. He has read Euromoney since the early 1970s so as to track developments in international banking and finance. He remembers the rationing and austerity of the 1980s when, as one of the few communist members of the IMF, Ceausescu exported the bulk of Romania’s output to pay back loans and build his pompous palace in central Bucharest. “It was incredible, Bucharest was in total darkness. A banknote was called a lottery note back then,” he recalls. When the communist regimes of eastern Europe began to fall, he was one of the few Romanians able to track events elsewhere, by virtue of a Reuters terminal in his institute. So, after 25 years of the market and as the critical economic policymaker of the country, does this one time Marxist economist believe the aspirations that fired the 1989 revolution have been delivered for Romanians? Yes, he says, “and fulfilled quickly after the revolution because shortages disappeared and Romanians suddenly had choice. They could hold foreign currency and speak with foreigners without needing a permit or being detained, and read what they wanted, and travel. “But then other dreams appeared, a new generation, and it is an irony that a part of society is complaining that there are too many rich (people) and too many poor, and they look back to the old times. “Of course, there are a lot of dreams which are not fulfilled.”Full article:
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