World Bank, EBRD to Give East Europe $31 Billion Aid

By Agnes Lovasz

Feb. 27 (Bloomberg) -- The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the global financial crisis.

“We have a special responsibility for the region and because it makes economic sense,” EBRD President Thomas Mirow said in a joint statement issued by the international organizations today in London. “For many years, the growing integration of Europe has been a source of prosperity and mutual benefit and we must not allow this process to be reversed.”

The EBRD will provide about 6 billion euros, the EIB about 11 billion euros and the World Bank about 7.5 billion euros, the statement said. The aid will take the form of equity and debt financing, credit lines and political risk insurance.

East European nations are struggling to refinance foreign- currency loans taken out by borrowers during years of prosperity through 2007, when economic growth averaged more than 5 percent. The International Monetary Fund, which has bailed out Latvia, Hungary, Serbia, Ukraine and Belarus, warned on Jan. 28 that bank losses may widen as “shocks are transmitted between mature and emerging-market banking systems.”

Currencies

The Polish zloty rose 0.5 percent, to 4.6843 against the euro at 9:36 a.m. in London, the Hungarian forint strengthened 1.2 percent, to 298.20 per euro. The Czech koruna was up 0.2 percent at 28.125 per euro and the Romanian leu was little changed at 4.2940.

The IMF welcomed the plan to assist east Europe.

“This initiative will help mitigate the effects of the financial crisis on credit flows in the region,” IMF Managing Director Dominique Strauss-Kahn said in a statement. “The joint efforts under this initiative will assist individual financial institutions and sectors, while IMF lending will continue to support countries at the macroeconomic level.”

The global credit crisis that has left banks with more than $2 trillion in losses and writedowns and triggered a simultaneous recession in the euro region, the U.S. and Japan, is taking its toll on emerging economies.

The region will have a recession this year as demand for exports collapses, the IMF said in January. The economies will shrink 0.4 percent, the IMF forecast. The slump combined with rising unemployment and falling currencies increases the risk of more borrowers defaulting on their loans.

EBRD Mission

The EBRD was created in 1991 to invest in former communist countries from the Balkans to Asia to help them transform their economies. The IFC is the World Bank’s private-sector lending arm and the EIB is the European Union’s lending vehicle.

The EBRD is investing a record 7 billion euros in central and east Europe this year to help the region weather the global economic crisis, compared with about 5.8 billion euros last year. Almost half of that amount will be used to help recapitalize the region’s banks, stung by the credit crunch to revive the flow of credit to companies, the lender said.

Moody’s Investors Service warned on Feb. 17 that Austrian, Swedish and other banks with subsidiaries in eastern Europe may face rating downgrades as economies in the region deteriorate.

Non-performing loans in the region rose to 8 percent from 5 percent through last year, and Standard & Poor’s has forecast they may top 25 percent on average, Nomura Holdings Inc. said in a Feb. 13 report.

Cheap Loans

As companies and consumers have sought cheap loans, denominated mainly in euros and Swiss francs, external liabilities reached about 100 percent of gross domestic product in Poland and the Czech Republic and almost twice the national output in Hungary, according to figures compiled by Nomura.

Euro-region banks’ exposure in central and east Europe totals $1.25 trillion.

A group of six banks, including Italy’s UniCredit SpA and Austria’s Raiffeisen International Bank Holding AG, have pressed the EU to organize financial aid for countries on its eastern fringes.

Austrian banks alone have lent 230 billion euros in the region, equal to about 80 percent of the country’s GDP, according to data compiled by the Bank for International Settlements.

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