Bloomberg News

Eastern Europe Faces Credit Risk as Development Bank Meets

May 18, 2012

The European Bank for Reconstruction and Development, which invests as much as 11 billion euros ($14 billion) a year in nations from Russia to Egypt, met today with credit flows again threatened by a resurgent euro crisis.

Shareholders elected Suma Chakrabarti, permanent secretary at the U.K. Justice Ministry, to head the London-based bank for the next four years. The 63 countries that own the EBRD with the European Union and the European Investment Bank are tomorrow due to approve 1 billion euros of lending to new democracies in the southern and eastern Mediterranean this year.

The EBRD has led efforts to avert a banking-industry collapse in eastern Europe, which was hardest hit by the global financial crisis that followed Lehman Brothers Holding Inc.’s 2008 demise. It has warned of renewed contagion risks as concern about Greece leaving the euro endangers funding from the western European banks that dominate lending in the region’s east.

“Given the Greek risk, euro-zone banks will probably be reluctant to increase their exposure to emerging Europe,” William Jackson, an economist at London-based Capital Economics, said yesterday by phone. “At best it looks like they’ll have a slow, gradual deleveraging from the region. This will be quite troubling for growth in several economies.”

Forint, Zloty

Hungary’s forint and Poland’s zloty have been the world’s worst and fourth-worst performers against the euro in the last five days, declining 2.7 percent and 1.8 percent, respectively. The forint fell 0.4 percent to 298.88 today in Budapest, while the zloty strengthened 0.2 percent to 4.3450.

Riskier assets extended slumps after European Central Bank President Mario Draghi this week acknowledged for the first time that Greece may leave the monetary union.

Western European banking groups have a “very strong” need to shed assets and reduce the size of their loan portfolios, Polish central bank Governor Marek Belka said today during a panel discussion on the sidelines of the meeting. Still, there are no obvious reasons for the banks to pull out of eastern Europe, he said.

“We need deleveraging if we accept the notion that one of the sources” of the crisis “is too much debt,” he said. “The problem with eastern Europe is that it’s not clear that there is too much debt.”

Western lenders have been profitable in eastern Europe, which means it’s not that region where they should primarily reduce assets, he said.

Tighter Rules

Tighter regulation, such as the Basel III rules, is required to bolster the global financial system, Belka said, adding that regulators have performed better in eastern Europe than in the continent’s west.

Eastern Europe relies on financing from western lenders such as UniCredit SpA (UCG) and Erste Group Bank AG (EBS), which own three- quarters of the region’s banking industry. The banks are cutting funding to their eastern units as stricter regulatory requirements force them to sell assets and bolster capital.

It also depends on western Europe to buy products including cars from Volkswagen AG (VOW)’s Czech-based unit, Skoda Auto.

“The trade channel, which is the most important between the euro area and central Europe, is having an impact because of slowing demand from the western parts of Europe,” EBRD President Thomas Mirow told reporters May 15. “It comes on top that we see an ongoing process of deleveraging of western banks, making credit and loans more difficult to access.”

First Competitive Vote

Chakrabarti won the first competitive leadership vote in the EBRD’s two-decade history, displacing incumbent Mirow, 59, who was bidding for a second term at the helm. The EU, which has chosen all five EBRD heads to date, failed to back a single candidate at a May 14 meeting in Brussels.

Other challengers were France’s Philippe de Fontaine Vive Curtaz, vice president at the European Investment Bank, ex- Polish Prime Minister Jan-Krzysztof Bielecki and Bozidar Djelic, a former deputy premier of Serbia.

Created in 1991 to support the transition of eastern Europe’s former communist nations to market-driven democracy, the EBRD has invested 71 billion euros in the last two decades.

Tunisia, Egypt, Morocco and Jordan are in line to become recipients under its expansion plans, with resources allocated to that region to reach as much as 2.5 billion euros a year this decade in addition to 8.5 billion euros a year invested in eastern Europe and central Asia, the bank has said.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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