EBRD considers big rise in capital

By Stefan Wagstyl, East Europe Editor

Published: May 7 2009 19:45 | Last updated: May 7 2009 19:45

The European Bank for Reconstruction and Development, the multilateral bank for eastern Europe, could be set for a big increase in its €20bn capital to help deal with the economic crisis.

The bank’s 60-odd government shareholders, who before the crisis were considering reducing the EBRD’s activities, are now mulling an expanded role to help fill the gap left by the dramatic drop in global capital flows.
EDITOR’S CHOICE
East Europe banks set for €24.5bn loan - Feb-27
EBRD considers stake in Latvia’s Parex Bank - Dec-19
Lex: Central and eastern Europe - Nov-28
Central and E Europe’s growth forecast slashed - Nov-25
EBRD set to fund Turkey - Oct-29
EBRD sees dire effects of borrowing freeze - Oct-14

Word of their discussions has emerged as the bank on Thursday announced its biggest-ever loan of €432m ($579m, £385m) to Italy’s Unicredit, the largest international bank in eastern Europe, and published its latest gloomy forecast for the region. It warned of a 5.3 per cent drop this year in gross domestic product – far worse than the 0.1 per cent contraction it predicted in January.

The possibility of a capital boost is likely to be debated at the bank’s annual meeting in London later this month but any increases would almost certainly not be implemented before the end of the EBRD’s next capital review in 2012.

In a Financial Times interview, Thomas Mirow, EBRD president, said that as well as dealing with the crisis, the bank was concerned by the aftermath, when private capital would not come back quickly into the region, leaving a bigger role for government-controlled international financial institutions.

Mr Mirow said it was “too early to say” whether he would support a capital increase. But he pointed out that the Group of 20 anti-crisis summit in London had backed plans for the EBRD to discuss such moves.

He said the bank could continue to do business at its current level of €7bn or €8bn annually without an increase but added: “If our shareholders want us to do much more, that is something around €10bn, then they would need to put more resources on the table.”

Meanwhile, with private capital scarce and banks in urgent need of funds, there is growing demand from the bank’s 27 countries of operation, including Turkey, which joined the list last year. Pre-crisis, the bank planned to pull out of central Europe by 2010 but has so far withdrawn from only the Czech Republic and has now put other “graduations” on hold.

The US, the bank’s largest shareholder, previously wanted the bank to reduce its activities. But following the crisis and Barack Obama’s election as president, Washington has boosted support for the bank – as it has for international financial institutions generally.

The EBRD is working closely with the International Monetary Fund and the World Bank on a €24bn bank support programme for eastern Europe.

The deal with Unicredit is likely to be followed by similar agreements with other big international banks. The EBRD is making loans to Unicredit subsidiaries in eight countries and aiming mainly at increasing credit to smaller companies.

In its economic forecast, the EBRD said the impact of the crisis was now spreading from the financial sector to companies and consumers.

But it did expect a slight recovery next year, with a 1.4 per cent average GDP increase.

Erik Berglof, chief economist, said: ”There are downside risks to these predictions. But now there is also upside potential. Our underlying outlook assumes continued external engagement, particularly from the western parents of banks in the region.”