Romania's credit-fueled boom and widening current account gap

In the years before the global financial crisis, Romania's National Bank governor Mugur Isarescu would later recount, the economy rode a wave of foreign capital inflows that financed a current account deficit which widened to well over 10% of GDP by 2007-2008, as households and firms borrowed heavily in euros and Swiss francs while wages rose faster than productivity. Rapid credit growth, much of it foreign-currency denominated and extended by foreign-owned banks, pushed domestic demand and imports far ahead of exports, while the leu appreciated for several years on the back of the same inflows, masking the buildup of external vulnerability. Isarescu's own retrospective account, delivered to the Bank for International Settlements in January 2010, described this period as one where external deficit financing appeared easy and cheap right up until global capital markets froze in late 2008, at which point Romania discovered how quickly the financing conditions that had enabled years of above-trend growth could reverse, exposing the economy's dependence on continued foreign funding just as that funding evaporated.