EBRD to seek capital boost for ex-Soviet bloc aid

13th May 2010, Comments 0 comments

The European Bank for Reconstruction and Development will seek a big capital increase at its annual meeting this week to strengthen the ex-Soviet bloc after the global recession and prevent Greek debt contagion.

The bank's board endorsed in March a proposal to increase its capital by 50 percent to 30 billion euros (38 billion dollars) and it is expected to be approved at a two-day governors meeting starting Friday in Zagreb, Croatia.

The EBRD, set up in 1991 to help former communist nations make the transition to market economies, operates in 29 countries and usually invests in private enterprises together with commercial partners.

Only two years ago the bank's mere existence was questioned as it had successfully carried out its initial mission of ushering in market economies, but EBRD officials believe the global downturn proved otherwise.

To ease the fallout from the recession, and to counter the drying up of private investment sources, the bank brought its investment to record levels, with eight billion euros planned for this year.

The global financial crisis ravaged economies in central and eastern Europe, largely because many of them were heavily reliant on foreign capital or high commodity prices.

The economy in the EBRD area -- stretching from central Europe to central Asia -- is expected to grow 3.3 percent this year after a contraction of six percent in 2009.

But the bank says the hard work is not over and that now is the time to tackle lasting imbalances that risk to halt the recovery, especially as the Greek debt crisis threatens to affect the region.

Earlier this month, EBRD president Thomas Mirow said he expects the annual meeting to hear "very intense and lively debates on the economic situation in the southeast of Europe and the potential impact of the situation in Greece."

"Yes, the economic situation has clearly improved compared to 2009, and we see growth returning, but we still face some external risks and I would like to engage with our shareholders to address challenges and vulnerabilities, to help our countries to make their growth model more robust," he said.

Mirow said there is a need to continue helping "emerging Europe" to correct its numerous weaknesses such as strong dependence on raw materials, the need to modernise infrastructure in various fields -- transport, telecoms, energy -- without forgetting the major challenge of climate change.

The EBRD is also concerned with the risks posed by the debt debacle in Greece, which has sparked fears that the problem could spread to other weak eurozone economies and beyond.

The bank sees "three potential channels of contagion" from Greece: a new eurozone downturn that could affect demand for the region's exports, a freeze in capital markets that might make it difficult for eastern European companies to find financing, and a potential risk for activities of Greek bank subsidiaries in the Balkans (notably in Romania, Bulgaria and Serbia).

At the Zagreb meeting, Mirow will ask the representatives of some 60 states and organisations which are bank shareholders to approve the 50-percent capital increase. The request is expected to be honoured.

This increase should allow to the bank to deliver between 8.5 and 9.0 billion euros each year between 2011 and 2015 instead of the current 5.0 to 6.0 billion euros.

© 2010 AFP

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