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Responding robustly to the financial crisis

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Varel Freeman, EBRD First Vice President

Varel Freeman, EBRD First Vice President,explains how the Bank is investing during a global financial crisis.

It’s almost a year since the financial crisis hit the world. How has this crisis affected the EBRD region?

The EBRD countries of operations have not escaped unscathed from the global shock. Decoupling has proven to be a myth and while the factors driving economic stress in the region where the EBRD operates are different from those that have driven economic stress in the United States, the results are the same. Credit has become difficult to obtain, economic growth has stopped and is actually moving backwards; the stress on employment is very high and the consumer is feeling very much worse-off than a year ago.

What is the EBRD’s response to the financial crisis?

The Bank has stepped up investments to address critical vulnerabilities and to create confidence in all countries of operations. The EBRD started its crisis response with a strong support programme for commercial banks with the view that it is important to get credit flowing again, particularly to small businesses, the engine of any economy, and with a balanced programme of support to infrastructure and to real sectors of the economy, the businesses that create jobs, produce goods and deliver services.

The EBRD plans to invest €7 billion this year, compared with €5.1 billion in 2008. This year, about 50 per cent of the EBRD’s investments are focused on financial institutions and roughly 25 per cent each on infrastructure and other key sectors of the real economy. The volumes have also risen dramatically. The Bank’s year-to-date investments are higher than ever before, exceeding last year’s level by 30-40 per cent. As of today, we have invested about €2 billion from central Europe to central Asia. By the time of the Annual Meeting, where many projects are due to be signed, that should be closer to €2.3 billion. That’s a record for pre-Annual Meeting volume and it is 60 per cent crisis-response focused.

This year the EBRD has also doubled the budget for its Trade Facilitation Programme to €1.5 billion to boost trade with and within eastern Europe, Central Asia, Russia and Ukraine.

And if there is a good side to the crisis, it is that it has encouraged international financial institutions (IFIs) to cooperate more effectively. A great example is in the financial sector where in a joint initiative, the EBRD, the European Investment Bank and the World Bank Group pledged to provide up to €24.5 billion to support the banking sector and to fund lending to businesses hit by the financial crisis.

IFIs are using their own comparative advantages to achieve a better end result. For example the IMF is leading in economic diagnosis, the understanding of the crisis and the formulation of policy responses. The World Bank is doing a great deal of macroeconomic work and formulating broad-scale financing responses for the public sector. The EBRD is focusing on the financial sector, helping with diagnosis of the state of the banking system; understanding the needs for recapitalisation and liquidity; and together with the EIB and other IFIs, it is providing equity and debt finance.

The joint financial sector initiative is a great example of half a dozen institutions working together to give a multibillion euro response to the most immediately affected sectors of the economies.

Will the EBRD continue to deliver with the same intensity during the second half of 2009?

Indeed we will. Right now the EBRD’s Operations Committee has conducted €11 billion of concept review clearances, which means €11 billion of projects waiting to happen. That is a record volume. It’s about €2.5 billion beyond the 2008 first quarter record. This shows that there is a huge demand for EBRD investments and the Bank is capable of doing much more than it has in the past to meet that demand.

What do EBRD clients expect from the Bank at a time of crisis?

Clients expect leadership, support and help with finding solutions. We are all working in an environment where there is no previous experience. A crisis of this scope and nature has not occurred in any of our lifetimes. In uncertain times, people look for sources of refuge and the EBRD has become one such source. Not that the Bank has a huge balance sheet and will be able to finance everyone’s needs and bring the crisis to a halt. But we can make a significant contribution with our creativity, leadership, risk-taking and balance sheet to addressing problems and to leveraging financing from other investors. The effect that we have on other people’s willingness to invest and on the formulation of stronger public policy is not to be underestimated.

These difficult times bring out the best in an institution such as the EBRD. Like our clients, the EBRD has great creativity, great resilience and dedicated staff.

By Marjola Xhunga, Communications Adviser
Photos: EBRD
12 May 2009