EBRD capital hike debate heats up

14/05/2009 | Simon Pirani, Phil Thornton

The debate over calls for a massive capital injection into the EBRD to channel funds to crisis-afflicted countries will come to a head this weekend when finance ministers gather for the bank’s annual meetings

The debate over calls for a massive capital injection into the EBRD to channel funds to crisis-afflicted countries will come to a head this weekend when finance ministers gather for the bank’s annual meetings.
Thomas Mirow, the EBRD president, has written to the bank’s 63 governors, saying that if the Bank is to carry on spending at the current rate, it will require more capital.
The EBRD has already raised its lending target for this year to a record €7 billion, a 37% increase on 2008’s €5.1 billion and a reversal of previous plans to reduce its activities to €3.9 billion.
In an interview with Emerging Markets, Mirow said he wanted to “get a sense of what amount and what direction of engagement our shareholders expect” from the Bank. “Are they happy with the substantive decisions we have taken? Do they expect possibly even more from us?”
His intervention follows the decision by shareholders in the Asia Development Bank (ADB) to triple its capital base to $165 billion. The EBRD’s last recapitalization was in 1996 when the capital base was doubled to €20 billion.
Mirow wants to bring forward a decision on the next five-year capital resources review to the Bank’s 2010 annual meeting in Zagreb. “That would mean that the basic footwork and analysis would need to be started after this annual meeting,” said Kurt Bayer, the Austrian board director on the EBRD.
Several sources at the EBRD told Emerging Markets Mirow did not want specific numbers mentioned this weekend. They said while European countries, especially those in central and eastern Europe worst affected by the crisis, wanted an increase, there were signs of splits on the board.
One source said Japan – which has contributed $100 billion to IMF recapitalization and $25.7 billion to the ADB – may hesitate to commit to a capital increase. Two of the board directors contacted by Emerging Markets played down speculation of funding increases. “No decisions are needed or will be taken this year,” one said.
The US will take no strong position as the Obama administration has not yet clarified its policy. The job of under-secretary for international affairs at the Treasury is vacant pending Senate approval of a new candidate, Lael Brainard. The US executive director declined to comment.
The EBRD’s status will be boosted by news that Australia has reversed last year’s decision to quit as a shareholder. Australia will announce its about-turn at tomorrow’s annual meeting but will warn it will “continue to review its position”.
Market turmoil landed the EBRD with a €602 million loss on its investment in 2008. Willem Buiter, a former chief economist at the EBRD, told Emerging Markets: “[The EBRD] must be taking massive losses as a result of this crisis. Its equity portfolio must look truly ugly so to maintain the volume of its operations would need additional capital.”
He said the EBRD’s role had become “muddled” as it moved away from its core role of stimulating private sector business. “It is an IMF-lite and it is unfortunate the functions have become muddled up. They are getting brought into issues that are not their mandate as it’s a case of all hands on deck.”

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