The EBRD has had a good war. The global financial crisis
turned the main regional development banks worldwide from the
zeroes of the boom years into the heroes of the coordinated
intervention to stabilize the economy.
For the EBRD, its ability to step in with substantial
financial assistance for the regions beleaguered banking
sector has helped give it a relevance and legitimacy many
commentators thought it had lost.
This bank has a very good track record,
EBRD president Thomas Mirow tells Emerging Markets in
an interview. It delivered a 55% increase in investments last
year in response to the global economic crisis, lending a
record E7.9 billion.
The largest share of funding was dedicated to the financial
sector as the bank sought to bolster banking sectors across
central and eastern Europe, many of which are almost entirely
owned by western European banks.
When the financial crisis triggered a liquidity crisis in
Frankfurt, Paris, Vienna and Stockholm, there were fears that
parent banks might repatriate much-needed capital from their
The fear was that these banks, whether Raiffeisen or
Société Générale, might withdraw or
at least reduce the volume of their regional operations because
they had problems back home, recalls Kurt Bayer, an
executive director at the EBRD. He says the Vienna Initiative
a combined EBRD programme with the European Investment
Bank, World Bank and private banks to mobilize E25 billion
Mirow is proud of the decision. The Vienna Initiative
was created I would say successfully to prevent
an unorderly wind down of western banks in the region, and this
indeed did not happen.
But Bayer concedes that the EBRD, along with other
watchdogs, may have gone amiss in overestimating
how robust the region was before the crisis. We did not
realize before the crisis the growth rates and the high
influxes of capital from outside were not sustainable and
[were] too high, Bayer says. Maybe we were too
The bank expects investments this year to be slightly
higher, and has sought shareholder approval for an increase in
capital to ensure it can invest at similar enhanced levels
during the coming five years. It is looking for E10 billion of
additional capital, or a 50% increase, from shareholders, which
are mainly made up of rich countries such as the United States,
Japan and members of the EU.
Most of the money (E9 billion) will come from
callable capital effectively pledges backed
by state guarantees with E1 billion being added to
paid-up capital from the reserves. This would leave the bank
with E6 billion of paid-in capital and E24 billion of callable
capital, compared with E5 billion and E15 billion respectively
The banks Capital Resources Review (CCR), which lays
out the reasons for the increase, assumes that demand for
funding will remain high over the coming years. The bank has
pencilled in investment of E8 billion this year, the same
amount as 2009, but with a probability that it may rise to E9
billion. Its five-year strategic review forecasts annual
investment of E8.59.0 billion between 2011 and 2015.
The proposal now goes to the board of governors
national finance ministers for a vote on Friday
afternoon. Kurt Bayer says there was a shared concern among the
directors over the possibility of a further financial upheaval.
Most of us said we have to be careful and the crisis in
our region is not over yet, he says. There are a
lot of non-performing loans coming through, so we have to be
prepared to help again.
Austria pressed for the money to come from paid-in capital,
but the consensus view was for a mix of callable and reserve
However, the US and Canada are believed to be pushing
for more restrictions on the types of investment, such as
environmentally damaging projects. According to Bankwatch, an
NGO that monitors the EBRD, both countries have asked the bank
to publish transition impact studies in the project summary
documents before any approval decision. Neither countrys
finance ministry responded to queries from Emerging
John Eyers, executive director for Australia and three other
countries, says Australia supported the consensus proposal for
the capital increase. The main reason is based on the
useful role which scaled-up EBRD operations are playing to
address some of the after-effects of the financial crisis
on the banks in the region, he says.
Joachim Schwarzer, Germanys executive director, says
there will be no friction at the board meeting.
The mood of the discussions was very cooperative. There
were differences in views, but the outcome can be fully
supported by all of us, he notes.
NGOs and campaign groups are using the recapitalization to
lobby shareholders to demand reform of the way the bank
operates. Pippa Gallop, research coordinator of Hungary-based
Bankwatch, says huge amounts of money were poured into
black holes last year.
This year, concrete steps must be taken to combine the
lessons of the financial crisis with the imperatives of
creating a low-carbon, socially just society, she says.
The EBRDs shareholder countries now have a prime
opportunity to do just that, if only they will seize it instead
of handing the bank a blank cheque.
She says recapitalization gives shareholders an opportunity
to ensure it meets its aim of supporting transition to an
energy-efficient, low-carbon economy. Although the bank
has increased energy efficiency investments, it is still
financing way too many carbon-intensive investments, either
coal-fired power stations or motorways, she says.
Gallop highlights the Nabucco gas pipeline, a coal-fired
power station in Slovenia and a new motorway in Slovakia as
examples of carbon-intensive investments. If there is one
thing we want from the meetings, we would really like them to
phase out their financing for fossil fuels, she says.
This is the one very glaring environmental mistake that
the EBRD is making.
Other critics have different complaints. The US Senate
Foreign Relations Committee lambasted the bank for lending 41%
of its resources to one country, Russia. The banks
limited resources clearly should be directed at countries with
fewer of their own resources, it said in its report into
the international financial institutions. Currently some
loans are reportedly going to Russian oligarchs and projects
that could obtain private capital.
Richard Wallis, the EBRDs communications chief in
Moscow, says the senators have a fair point but
insists there are good reasons to target big-ticket projects.
If we want to bring about any change in an area like
infrastructure and introduce private/public partnerships, who
else has got the cash flow to handle these gigantic
projects? he asks. PPPs are very important to bring
deals out of smoke-filled rooms and into the open, where they
are accountable and where civil society is able to exercise
Schwarzer says there should be no taboo about
working with large companies. Larger or smaller is not a
criterion, he says. The question in the end is
whether it helps to create jobs and to create income. We need
to work with systemic companies because, when we work with
them, they are able to make a difference which is a signal for
the whole economy.
But there is a growing feeling the bank needs to refocus its
strategy. Bayer alludes to its own surveys that point to a
coolness towards the free market medicine the EBRD prescribes.
Its 2007 Life in Transition survey included the finding that
trust in society among 29,000 respondents across the region had
plummeted since 1989.
Bayer, who was a director at the World Bank before being
appointed to the EBRD board, says it highlights a need for
change. While the economic data show there has been
progress, people are quite disillusioned and say that
transition has not benefited them, he says. We can
see that in the political backlash. People say they want to
have state-run services back or that they cant manage
with the high volatility and less social security than the
market system brings.
He says a little bit more realization of the human
benefits of transition by the EBRD and private-sector
banks would be warranted. He admits it is not a super
popular idea in the bank but believes it could become an
issue at the annual meetings this weekend. Borrowing a
catchphrase from fellow Austrian-born policy-maker Arnold
Schwarzenegger, he adds: It is not in the nature of
bankers to bring the human side in. They see it as a
Schwarzer says the mandate of the bank should be to support
market economies and democracy. If you look at the region
there is a lot to do. A lot has been achieved, but our
challenges have developed, and this bank can really make a
difference. We have acquired skills over all these years that
are really very helpful for the region. What we do in this
region is in the interests of all our shareholders.
Bayer, who stresses he is speaking in a personal capacity,
believes there should be a stronger focus on
investing in small- and medium-sized enterprises (SMEs).
We do a lot of big projects, but they do not create a
large number of jobs, he says, pointing to healthcare as
an area that would both create jobs and score well on the
Schwarzer says that he is keen to see more lending go
towards the SME sector that in Germany is known as the
mittelstand. We in Germany know how important these
companies are for growth and stability but also as a political
component, because they can be the grass roots for creating a
broad civil society, he says.
Wallis says an increasing amount of lending goes
specifically towards the SME sector, but that investing in
major projects can deliver more in terms of achieving
transition towards market-oriented economies. I think the
EBRD strikes a fair balance where it combines a lot of
big-ticket deals, he says. How else could we have
saved the banking system other than through big-ticket deals?
It was urgent to send out a lifeline.
That is not to say the bank has not learned lessons from the
crisis. Mirow says countries must no longer depend too heavily
on foreign capital and investment while neglecting high current
account deficits, just because it seems so easy to
refinance them. It is better to look for more robust and
resilient growth patterns, even if they then would imply that
the catch-up process takes a little longer.