CHECK AGAINST DELIVERY 23.06.2009
Statement by Thomas MIROW
President of the European Bank for Reconstruction and Development
on the occasion of the third part of the 2009 Ordinary Session
of the Council of Europe Parliamentary Assembly
(Strasbourg, 22-26 June 2009)
Representatives of the Parliamentary Assembly of the Council of Europe,
Good afternoon and thank you for very much for inviting us to this discussion today about the EBRD’s activities. The Council of Europe and our Bank have been partners since 1992 and we have always valued your scrutiny and benefited from your views and advice. The last time we met was in January in London at our headquarters where I briefed members of the Committee on Economic Affairs and Development on our activities in 2008 and we had a fruitful discussion.
Before we go into today’s discussion allow me to provide you with a brief overview of the latest developments in the EBRD region and our activities.
[1. Crisis overview]
The EBRD countries of operations remain seriously affected by the global financial crisis. Today our economists expect a contraction of about five percent on average in our region this year.
At this point we expect no country in the region, except for financially less integrated countries, especially in Central Asia, to exhibit positive growth this year, although Poland may avoid a contraction. Ten countries – including Romania, Russia, Turkey, and Ukraine – are expected to suffer severe recessions or depressions, with growth in the order of -4 to -15 percent in 2009.
Why so severe? For many years the countries of our region benefited from strong capital inflows, high demand for their goods and high prices for commodities. But this abundance also put a veil on existing vulnerabilities and reduced the incentives to diversify economies and implement reforms.
Thus these years created an increasing dependence on external demand and foreign financing, while the broadening of production structures and the development of local capital markets lagged behind. Once the external funding dried up, these weaknesses were not only exposed but made the impact of the crisis even harder.
But the crisis is just as noteworthy for what we have not seen in the EBRD region: there have not been systemic banking and uncontrolled currency collapses, reform reversals, or challenges to democratic systems. Notwithstanding exposure to external shocks and a deep recession, the standard elements of past emerging market crises have been largely absent so far.
What explains this? First of all, the level and quality of trade, financial, and – in many cases – institutional integration with Europe and the global economy over the past 20 years. Bank financing and foreign direct investment in the EBRD region are based on long-term commitments, not “hot money”, as emerging market financing has so often been.
Secondly, broader democratic forces have also been at work. Close political and institutional ties proved to be instrumental in mobilising unprecedented international support. It is here where your institution is performing an important role. The increasing integration is giving resilience to the way the EBRD countries are coping with the crisis.
[2. Regional overview]
Allow me to look at a few selected countries and regions, respectively, which are of special interest to you. I was invited to attend the International Economic Summit in St Petersburg earlier this month and it was encouraging to hear the frank assessment of the situation in Russia. The country’s output declined by more than 6 percent in the first quarter this year, but the mature and decisive response of policy-makers has prevented worse. Yet much remains to be done, with a focus on the banking sector and measures to mitigate a steep rise in unemployment.
In South Eastern Europe the three biggest economies – Bulgaria, Rumania and Serbia – were stabilised earlier this year by support packages from the IMF. Bulgaria and Romania also have access to EU funds, while the new Serbian authorities moved quickly to avoid a worsening of the crisis. These timely efforts demonstrate the importance of cooperation and support and I think the international community – financial as well as political institutions – deserve praise for their crisis response.
The situation remains serious in Ukraine, where output was badly affected by the slump in exports and our economists now expect a contraction of -10 percent this year. The complex political situation is not making things any easier and the forthcoming elections are already casting long clouds. However, there are also positive developments to report: The stabilisation of the banking sector is making progress and the IMF and the Ukrainian authorities have reached agreement over the disbursement of the second trance of the IMF loan.
The countries of the Caucasus region have been affected by the crisis to varying degrees. Armenia for a long time proved to be very resilient, but is now suffering from a steep decline in remittances and the impacts of the crisis in Russia. Azerbaijan remains in a comparably strong position thanks to its natural wealth, but also because the high export incomes of recent years have been set aside prudently. Georgia, however, is faced with a twofold challenge, namely the aftermath of last year’s conflict with Russia and the impact of the global crisis on the country.
[3. Short term prospects]
For six months we heard nothing but bad news about the economy. In recent weeks this has changed. Also in the EBRD region we can now detect some “green shoots” of recovery. Some countries are showing signs that the output decline is decelerating. Financial markets have improved almost across the board. The risks of macroeconomic collapses or the withdrawal of strategic investors which could trigger the collapse of systemic banks has receded.
Yet, despite these hopeful signs, I would guard against excessive optimism. The social impact of the crisis will come with a time-lag, but it will undoubtedly be severe. And there will be challenges to this fledgling stabilisation in the next 3-9 months, as the output collapses of the last two quarters feed their way back into the financial system. Non-performing loans are still significantly below their expected peaks. And corporate defaults could have knock-on effects on supply and payment chains.
[4. The EBRD response]
The crisis in the region has also presented the EBRD with unprecedented challenges. Already last year we adopted a crisis response package which has allowed us to react swiftly, decisively and targeted to the new circumstances. We are focused on the support of the financial sector, viable enterprises, especially SMEs, and critical infrastructure projects which are threatened by the current situation in financial markets.
With the agreement of our shareholders we have decided to raise our business volume this year to about €7 billion and the development of our business so far shows that we are on target. The demand for EBRD financing and our other services is stronger than ever, also in central and eastern Europe.
We were hugely encouraged by the unanimous support for our crisis response by our shareholders at our recent Annual Meeting in mid-May. Governments expressed their appreciation for the Bank’s multiple efforts to mitigate the crisis. We were also encouraged by our business guests at the meeting who explicitly emphasised their long term commitment to the region.
The crisis, however, will not only find its expression in our increased business volume. Last year we recorded a loss of €600 million, largely a result of unrealized losses in the EBRD’s holding of equity stakes which have fallen in value in line with the decline of stock markets worldwide. This year we are making provisions against impairments. But let me assure you that the EBRD remains a well-founded and stable institution with a prudent management of our finances and investments.
[5. Policy response]
But we are providing more than finance. The EBRD – together with other international financial institutions – has been at the forefront of a joint initiative with financial authorities in east and west to coordinate with major foreign-owned banks so that they maintain their exposures in emerging European countries. Such commitments have now been agreed for Hungary, Romania and Serbia. In Ukraine we are also involved in multi-party talks about the stabilisation of the financial sector.
Together with the European Investment Bank and the World Bank Group we launched a €25 billion action plan to stabilise the financial sector in emerging Europe and secure on-lending to enterprises, especially SMEs. The action plan is on track, in part thanks to new, innovative instruments that deliver fast and significant funding.
Our activities are complementary to the wider policy response which has gather speed and depth since the beginning of the year, with the European Commission in the lead role. The G20 London Summit provided a further boost to international cooperation, and we are encouraged by the fact that the danger of a regression into protectionism or the withdrawal of strategic investors has largely been averted.
Ladies and gentlemen,
The crisis is confronting us with difficult tasks and even if we are now seeing “green shoots” we must be aware that more challenges are yet to come. Rising unemployment will create social tensions which have to be expected to test the political stability of our region too.
It is here that the Council of Europe has an extraordinarily role to play, today and in the future. We are proud to be associated with you as our mandates and missions are concordant in regards to the promotion of democratic stability on the basis of the common values of the rule of law and democracy.
Especially in the year when we are celebrating the 20th anniversary of the fall of the Iron Curtain we must not allow the financial crisis to undermine the political foundations of Europe. Our means may be different, but they are complementary, because this is your goal as much as our goal. Therefore we look forward to many more years of successful cooperation.
Thank you for your attention.