Responding to the Crisis in Eastern Europe
March 04, 2009—From 2000-2007, the countries of Eastern Europe and the former Soviet Union enjoyed strong economic growth and improved living standards. As a result, almost 40 million people moved out of poverty in the years following the Russian financial crisis of 1998-99.
The region that stretches from Tallinn and Tirana in the West to Vladivostok and Bishkek in the East was back on its feet - and many countries enjoyed robust development of their banking sector and convergence with the more developed market economies of Western Europe. This augured well for their future prospects.
By the end of 2008 though, the first waves of the global financial crisis had hit banks in Eastern Europe particularly hard. The optimistic predictions that the region would escape the credit crisis distressing the United States proved false. Low interest rates and easy credit have since given way to a dearth of liquidity and capital problems in the banks amid slowing global and regional growth and trade. In Ukraine, for example, foreign investment has largely dried up, leaving it unclear whether banks with large debts in dollars and euros will be able to roll over short-term loans. The government has already seized a few large banks, suspending payments to creditors.
Against this background, the largest multilateral investors and lenders in Eastern Europe - the EBRD, the EIB Group, and the World Bank Group - recently agreed to provide up to €24.5 billion to support the banking sectors in the region and to fund lending to businesses knocked by the global economic crisis.
In total, the World Bank Group intends to propose to its Board of Directors lending and guarantee support to the banking sector in the region of up to €7.5 billion equivalent. IBRD intends to increase lending in Europe and Central Asia up to €16 billion in 2009-10, out of which up to €3.5 billion is envisaged for addressing banking sector issues; IFC, through its crisis response initiatives in sectors including banking, infrastructure, and trade as well as through its traditional investment and advisory services, is expected to contribute up to €2 billion; MIGA will provide political risk insurance capacity of up to €2 billion for bank lending.
“A strong banking sector is critical to ensure that businesses have access to the capital they need to grow and create jobs and that households have a safe place to entrust their hard earned savings to,” says Shigeo Katsu, World Bank Vice-President for ECA Region. “This initiative will help to fund the innovation that keeps businesses healthy and keeps people working, which makes a big difference to families already struggling to cope. The biggest challenge now is to ensure that the significant gains in living standards recorded over the past decade in the region are not lost.”
The international investor/lender initiative complements and supports national crisis responses and will deploy rapid, large-scale, and coordinated financial assistance from the international financial institutions to support lending to the real economy through private banking groups, in particular to small and medium-sized enterprises. The financial support will include equity and debt finance, credit lines, and political risk insurance.
MIGA guarantees will help the financial sector meet its pressing capital and liquidity needs. The guarantees will back financing from parent banks, which have strongly committed to supporting their subsidiaries in the region, with assistance from their home countries, as well as from governments that host the subsidiaries of bank groups and possibly additional sources.
“Countries in Eastern Europe continue to rely on private sector investment and FDI to overcome the crisis and restore economic growth. But with liquidity drying up, the risk appetites of international investors for projects in Eastern European economies dropped substantially”. says MIGA’s Executive Vice President Izumi Kobayashi. “MIGA will play a critical role in helping Eastern European countries by supporting lending to the real economy through private banking groups.”
Last fiscal year, MIGA issued $2.1 billion in guarantees to underpin developmentally beneficial foreign direct investment in developing countries. MIGA has already supported various investments in banking in Russia and Ukraine worth over $480 million. MIGA’s support for the banking sector in transition countries is consistent with the World Bank Group’s efforts to help countries strengthen their economies, bolster financial systems, restore growth, and protect the most vulnerable.
“MIGA’s products and services are now more critical than ever before to bolster confidence in the financial sector. By providing guarantees to cover loans to banks, MIGA can help address the economic and financial vulnerabilities of the Eastern European countries in the times of the global crisis”, says Kobayashi. “We stand ready to provide effective and timely assistance to countries affected by the financial crisis.”