EBRD wants less foreign currency lending

RIGA - The Greek debt crisis that’s threatening to break up the eurozone may spill over to Eastern Europe and spoil the region’s still fragile recovery, said the EBRD, reports Bloomberg. The EBRD raised its 2010 economic growth forecast for the 30 countries it invests in to 3.7 percent on average, up from 3.3 percent predicted in January. Still, it warned that the struggle to contain a debt crisis in Western Europe may stall the region’s growth.

German Chancellor Angela Merkel said Europe is in a “very, very serious situation” despite a rescue package for the region’s most indebted nations. Meantime, Spain’s El Pais newspaper reported that French President Nicolas Sarkozy threatened to withdraw his country from the euro. Finance Minister Christine Lagarde and other government officials denied the report.

The euro region’s tensions may affect Eastern Europe through “a disruption of capital markets” as well as “a decrease in import demand from countries like Germany or France to which most countries are important exporters,” said EBRD President Thomas Mirow.

The EBRD raised the forecast for Russia to 4.4 percent from 3.9 percent. It also revised higher outlooks for Turkey, Poland, Hungary, and Ukraine. Even so, countries in the east need to monitor statements and actions by western European leaders. “The outlook remains very uncertain because of a shift in risks from the domestic to the external,” said EBRD Chief Economist Erik Berglof.  While the EBRD now expects most countries where it operates to recover, the rebound will be protracted, it said. Growth rates will remain below pre-crisis levels and former drivers of expansion, such as investment from abroad and consumer spending, will remain subdued. The region was growing at an average 5 percent a year before 2008.

The EBRD’s shareholders at their meeting also increased the bank’s resources for the next five years. They approved increasing the bank’s capital 50 percent to 30 billion euros, enabling it to invest about 52 billion euros until 2015.
It also announced a plan to limit foreign currency lending by Eastern Europe banks, after they brought some countries to the verge of default during the global credit crisis. The bank stepped up efforts to wean the region off foreign-currency financing and encourage banks to lend in local currency.

Underdeveloped financial markets, low saving rates and high local interest rates contributed to a surge in foreign currency loans during the boom years, the EBRD said. East European banks and their parents in Austria, Italy, Germany and Sweden struggled to refinance foreign-currency mortgages, car and consumer loans.
The bank’s shareholders have pledged to support an EBRD program focused on helping companies as well as enabling countries with excessive reliance on raw-material exports, such as Russia, or few manufactured goods, such as Central Europe, to diversify production and become more competitive.

The EBRD helped limit the impact of the financial crisis, which hit emerging Europe the hardest, by persuading western banks to remain in the region and providing them with funds to lend to businesses.
The bank has devoted 47 billion euros to the region in equity investment and development loans since it was established in 1991. The capital increase will open the way to investments of 9 billion euros in each of the next two years and 8.5 billion euros in the succeeding three years. The bank this year will spend 8 billion euros on loans and company stakes. Funding reached 1.7 billion euros in the first quarter, 60 percent more than in the same period last year, the bank has said.

The EBRD, owned by 61 countries and two intergovernmental institutions, was created in 1991 to invest in former communist countries from the Balkans to Asia to help them transform their economies.