Second wind

14/05/2009 | Mark Johnson

Just a year ago calls were growing to wind down the EBRD. Now shareholders are pondering a possible capital increase. Its president Thomas Mirow explains what’s changed – and why he thinks the bank is more important than ever

Just a year ago calls were growing to wind down the EBRD. Now shareholders are pondering a possible €20 billion capital increase. Its president Thomas Mirow explains what’s changed – and why he thinks the bank is more important than ever

A year ago the EBRD headed into its annual meeting against a backdrop of persistent questioning of its future shape and purpose. At least one shareholder wanted out, others some of their contributions back in the form of a special dividend. Critics argued that, with its mission largely accomplished, the EBRD should prepare for eventual wind-down, or merger with another institution. An effective takeover by the EIB (European Investment Bank) was openly touted. 

Fast forward to early 2009. The Bank is an institution revitalized, its purpose no longer questioned. With regional GDP forecast to decline by up to 6% this year and much of the problem firmly located in the banking sector, the EBRD feels like the right institution, in the right place, at the right time.

“Things indeed have totally changed,” says EBRD president, Thomas Mirow. “There is a broadly shared view of shareholders that the Bank should deliver on efficient crisis management – so it is certainly a totally different feeling for people working in the Bank in terms of being needed and the institution not being called into question.”

Key tasks

Appointed president of the EBRD at last year’s meeting, Mirow, the former second-in-command at the German finance ministry goes into his first annual meeting charged with a few key tasks: making sure that the Bank has positioned itself properly in a year in which so much changed, so fast; clarifying rules of engagement with other actors in the drama, particularly other IFIs (international financial institutions); and – most of all – preparing for negotiations over the EBRD’s capital structure that officially start in 2010.

“What we need to get is a sense of what amount and what direction of engagement our shareholders expect from us,” says Mirow. “Are they happy with the substantive decisions we have taken? Do they expect possibly even more from us?”

That question is no empty one: it is clear that the talks with shareholders will focus on a possible increase in its E20 billion capital base to help it cope with the expanded size of the task it is charged with. The EBRD expects to lend €7 billion this year, up from €5.1 billion in 2008.

Interviewed in late April by Emerging Markets as he prepared for the London meeting, Mirow says he inherited an institution that was in good shape from the two-term incumbent Jean Lemiere. “It was well run, well managed,” he says. “There was not a need for immediate change.”

That may be so, but there is little doubt that the all-too-public debate over its future had a corrosive effect on staff morale.

Morale change

Says one former long-time EBRD staffer, speaking on conditions of anonymity: “In the last phase the institution was dominated by the questions ‘Should the Bank pay a dividend?  Would it continue in the same shape?’ People were asking what their future was – it was obviously not helpful for the morale of people or the ability of senior management to remain focused.” He adds: “The environment has changed so dramatically; this debate is not a debate any longer.”

But being pushed back to centre stage in the region comes with a price. “We have certainly a situation in which people have individually to work very hard,” says Mirow, “sometimes to the borders of their possibilities.” 

That puts One Exchange Square firmly on the map of headhunters. “We are hiring, but not excessively,” says Mirow. He adds that between 50 and 60 people may be taken on, mostly from the private sector. While the EBRD has always valued rotation between the private sector and the Bank, before the credit crunch the lure of private-sector pay packages contributed to a brain drain from the Bank.

Asked about the mood inside the Bank after Mirow’s first year, EBRD staffers say he has made a good impression, taking time to understand the institution and giving senior management as much breathing space as is possible in a supercharged environment. He is often portrayed as a rather colourless German politician; his office is famously Spartan, and his style certainly contrasts with that of his predecessor. But staff particularly value his wide range of contacts at the international level, honed during his stint at the finance ministry in Berlin, where his responsibilities included relations with international financial institutions. 

Mirow’s candidacy attracted some controversy: some critics saw it as part of a wider French-German manoeuvring over top slots at international financial institutions, and some central and eastern countries pressed for a president from the region itself. But that is firmly in the past. “At the very moment you are elected, you are elected, and I haven’t heard any critical opinion since,” says Mirow. 

Being needed helps, of course: the EBRD’s skills are once more in demand. “The EBRD always had a very special role, in between the private and the public sector,” says the former EBRD staffer. “The numbers had to add up but it was not necessary to make money. It is the only institution structured to take on risky investments and see them through to a successful conclusion.”

Where the money goes

The Bank’s response took more concrete shape in late February when the World Bank, the EBRD and the EIB announced a lending package of up to €24.5 billion for the region. The World Bank is prepared to lend €5.5 billion for banking, trade and infrastructure finance (plus €2 billion for political risk insurance) while the EIB will lend up to €11 billion to small and medium-sized businesses. The EBRD is offering up to €6 billion in loans and equity stakes in banks. 

The EBRD has already moved into action: in April it announced it was taking a 25% stake costing €84.2 million in Parex Bank, the Latvian bank forced into the arms of the state by the crisis. Parex got a €22 billion loan from the EBRD as part of the investment. 

In May, the programme moved up a gear as the EBRD announced it would invest €432.4 million in 10 central and eastern European subsidiaries of the UniCredit Group, the largest banking group in the region. 

The money will chiefly be used to boost the flow of credit to small and medium-sized enterprises across the region. Those kinds of investment demand the key skills built up in the Bank’s 18-year existence. Indeed, in some respects, it’s back to the future for the EBRD. But Mirow points out that it is only part of a bigger picture. 

The IFI banking initiative announced in February is, says Mirow, “not only an effort to fund together the banks but a coordinated effort with country regulators and central banks to tackle problems”. As has become all too clear as the crisis has unfolded across Europe, meshing the interests of different parties is not easy, particularly when they reside in different countries – or are cross-border institutions. 

Take the IMF – a key player in the policy response to the crisis. Hungary, Poland, Ukraine and Latvia are already in IMF programmes, either to shore up economies or as a precautionary measure. But the IMF suspended lending to Latvia in April, arguing that the budget cuts contained in the government’s stabilization programme did not go deep enough. Latvia’s economy looks set to contract by 12% in 2009 – the worst recession in the European Union – and rioting earlier this year has already toppled a government. 

In a region with famously volatile politics, an episode such as this is unlikely to be the last. This matters, says Mirow: “We cannot meaningfully try to stabilize banks if on the other hand the states have not agreed with the IMF on macro help.”

The Latvian government hopes to present a budget acceptable to both parliament and the IMF in June – when the next tranche of the IMF loan is due to be disbursed – and the turmoil has yet to undermine the EBRD’s investment in Parex. Still, it is clear that the EBRD’s rescue attempts will be played out against a volatile background. Mirow stresses that the EBRD is working as hard as it can to fashion a joined-up approach to the region by all parties involved. 

Clarifying objectives

Few doubt the desire of the IFIs to work effectively together, but some express concern that the rules of engagement are not clear enough. “The IFIs are unsure about how to respond to the crisis,” says a financier active in the region. That is a problem with more than one dimension, he argues: “The cooperation between, say, the EIB and the EBRD has been OK, but it is really difficult to see the projects where they can work together.” 

He argues that potential recipients in the region can be unsure about what they can and cannot get. “The supranationals should be more precise on the terms that they will distribute money into the real economy.” 

With its more focused remit and more defined pool of potential clients, the EBRD is perhaps less open to this criticism; Mirow argues that to the extent that the Bank is communicating to the general public, it takes care to explain its mission. 

Still Mirow has not been afraid to venture into the high-octane political debate about the policy response: in March this year he added his voice to those arguing for a cut in the waiting time potential Euro members in the region had to spend in the Exchange Rate Mechanism. 

Despite a firm rebuttal of this suggestion, Mirow is still convinced that the eurozone membership process should be used as a buttress for the region. “There was a clear decision by the eurozone ministers and the European Central Bank [ECB] that they would not envisage [fast track-membership] and so I made an alternative proposal which is still valid today, that they should team up with the EU 8-2 [minus existing Euro members Slovakia and Slovenia] and try to agree a comprehensive plan as to who would do what to join the eurozone by when and agree that with the EU and the ECB.”

Adds Mirow: “I still think that this would be an immense trust-building element if the markets were to perceive eurozone accession not only as an abstract political goal but an imminent political avenue which has been concretely determined.” 

Unsurprisingly, Mirow has little truck with those who argue that the crisis will delay eurozone membership for the region. “This is laid down in accession treaties,” he says. “That is forgotten by some. What I argue for is accession treaties to be taken seriously.”

The EBRD’s brief covers, of course, more than potential eurozone members; it is an institution necessarily forced to deal with variable geometry. Russia will remain the Bank’s single largest area of operation in coming years though the renewed focus on central Europe will slow the rate of growth in investment in that country. (Some in the Bank, and outside, have argued for some time that the EBRD was doing too much business there, and sometimes with the wrong people.)

Turkey joined as a full EBRD member last year and will represent another potential call on the Bank’s resources. Juggling these demands will call for all Mirow’s diplomatic skills, but amidst the noise Mirow is determined to keep his institution focused on the future. “What we are trying to do is to link a response to the crisis with a mid-term perspective in view of a forthcoming recovery in the region,” he concludes.

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