The EBRD is working hard to strengthen local capital markets and encourage the use of local currencies in its countries of operation to counteract major weaknesses in their transitions.
The financial crisis has exposed two serious shortcomings in the region’s economies: excessive reliance on foreign capital and excessive use of foreign exchange borrowing.
Foreign currency lending has helped increase convergence in the region but large capital inflows have also led to overheating, macro imbalances and the systemic risk of borrowers without foreign currency income (unhedged borrowers) being unable to repay loans.
Volatility on the foreign exchange markets and the depreciation of local currencies has only made the problems suffered by transition countries during the financial crisis more acute.
The EBRD’s Local Currency and Local Capital Markets Initiative, launched in May 2010, aims to enhance the macroeconomic, regulatory and market framework to ensure long-term, sustainable and liquid local currency markets.
The EBRD’s contribution to wider efforts to expand the use of foreign currency and back local capital markets includes:
Local currency funding operations and technical cooperation to develop domestic market infrastructure.
Local currency funding, lending and debt and equity investments, notably to strengthen the local investor base (especially by supporting pension funds and the insurance sector).
Policy dialogue together with other International Financial Institutions (IFIs).
The EBRD first made a loan and issued bonds in a local currency (Hungarian forints) in 1994 but the bulk of its lending has usually been in euros or US dollars.
Now the EBRD has increased the size of its own local currency lending to the equivalent of €979 million for the first nine months of 2011, agreeing deals in Russian roubles, Polish zloty, Kazakh tenge and Romanian lei as well as other local currencies.