EBRD and the financial crisis

Background
When the credit crunch that emerged in the United States in the summer of 2007 threatened to turn into a full-blown global financial crisis, there were hopes that it might pass eastern Europe by.

Those hopes were misplaced. The last quarter of 2008, just after the collapse of the U.S. bank Lehman Brothers, saw plunges in global trade levels that had a significant impact on export-dependent eastern Europe. Many economies in the region collapsed.

The crisis underscored the extent to which many of the countries in the EBRD region were financially integrated into the global economy There appeared to be no mechanism for a coordinated response to reach out to countries that were members of the Eurozone or European Union, were EU aspirants or countries that were firmly outside of Europe.

What the EBRD has done

The Vienna Initiative

The EBRD played a key role in the inception of the "Vienna Initiative" in 2009.  This brought together the combined forces of the governments and authorities from western Banking groups and their eastern subsidiaries, the IMF, European institutions and multi-lateral development banks like the EBRD. Funding of €25 billion was pledged over two years for eastern European banks to onlend to businesses.

In an immediate response to the financial needs of a creaking banking sector and of real economies starved of credit, under the Joint Action Plan the EBRD, World Bank Group and the European Investment Bank pledged on 27 February 2009 to provide €25 billion in funding over two years for eastern European banks to onlend to businesses.

At the same time the EBRD sought to shore up locally owned-banks, such as the systemically important Parex Banka in Latvia, which benefited from an equity investment and loans from the Bank.

The Vienna initiative also delineated a division of labour among all potential supporters of the region. The IMF provided macro support, the EU sharply increased Balance of Payments funding, the ECB added liquidity and MDBs invested in key areas of the economies hit worst by the crisis.

Crucially, the initiative provided a framework for discussion which led western banks to remain engaged in the region and not to turn their back on countries suffering the worst economic crisis since the collapse of communism.

The financial integration that had earlier appeared to have been a source of the problem emerged as a salvation out of the crisis.

Increasing investments

The EBRD sharply increased its investments by more than 50 percent in 2009. In 2010 a capital increase was approved, which has paved the way for a further increase in investments in coming years.

After the Bank had focussed on the immediate requirements of the financial sector in 2009, investments will now rise in the corporate sector as enterprises still grapple with the crisis. Investments will remain strong in the energy and infrastructure sectors. Energy efficiency financing remains core to the long-term sustainability of the region.

Via its increased focus on investments in the corporate sector, the EBRD will seek to further the drive to diversify economies away from dependence on raw materials such as oil and gas.

Diversification also means adding value to products, raising the sophistication of exports and developing a “knowledge economy” partly via a rise in technology financing.

Meeting challenges of the future

The EBRD will also seek to draw on the lessons of the crisis and, together with its sister organisations, come to practicable solutions. If it was broadly accepted that the growth model that depended heavily on financial integration was the right one to follow, the crisis has thrown up flaws in the system that need to be addressed.

Key among these are the dependence of foreign borrowing and in some cases an excessive reliance on foreign currency exposure.

That process has already begun, partly in the context of the next stage of the “Vienna Initiative” where the key players are working on ways to reduce e foreign lending while helping to develop local capital markets to support local funding with reduced foreign currency risk.

In the longer term, the EBRD remains convinced that the economies of eastern Europe have an enormous potential – both as targets for continued foreign investment but also I providing jobs and security for populations who have suffered great hardship since the fall of the Iron Curtain.

Growth may be slower in the future, but it is likely to be more sustainable, especially if those lessons from the past are learnt. That much hoped-for convergence with the west remains a clear promise for the future.

 

Further information: please contact the EBRD press office

 

Last updated 27 January 2012