The crisis in Eastern Europe is not over

Interview with Thomas Mirow, President of the European Bank for Reconstruction and Development

For the president of the European Bank for Reconstruction and Development, Thomas Mirow, the crisis in Eastern Europe has only just begun. In an interview with Handelsblatt, he explains why the economic recession here turned out to be so deep, how these states can be helped and why, despite everything, he is relatively optimistic.

Mr. Mirow, in Eastern Europe is relatively calm. Could there have been cases of state defaults there for a long time, if not for the billions of help from the IMF and the European Union?

I would like to note precisely that it didn’t get to state defaults. This indicates that international institutions are functioning. However, the phrase “relatively calm” is very accurate. What is happening now in the real economies of countries such as Latvia or Ukraine is truly dramatic. The national economy of Ukraine will decrease this year by 15% – this is a gigantic amount. So we can talk about calm only in relation to banks – here the situation is really better. But we must not pretend as if the crisis in Eastern Europe had already passed.

The fact that not a single state default occurred in Eastern Europe is a strong difference from other crises, for example, in Latin America?

Right. Over the past twenty years since the fall of the Iron Curtain, Eastern European countries have been able to integrate into the global economy. And despite the fact that international investors have again left this region, there are other banks and concerns that have long-term interests in Eastern Europe. These firms did not say goodbye to the region, but remain in it. Behind all this is the belief that the crisis will not last forever, and that in the long run, a period of economic recovery will begin again. Of course, it helps that most countries are members of the European Union – this is of great importance primarily in terms of institutional security.

And yet, why is the crisis in Eastern Europe so deep? Why is the economy of a country like Ukraine reduced by 15% this year?

In past years, Eastern Europe has received very great benefits due to international capital inflows. In addition, there was a strong demand for products from this region. Well, whoever could offer raw materials also benefited from high prices in the world market. However, now the flows of international capital have dried up, most of the money has been pulled back. On the whole, it can be said that Eastern European states were too dependent on foreign capital. Although their economies were growing at a very fast pace, this was not happening on the basis of total equity.

Didn’t it happen that a powerful inflow of capital literally forced the economy to develop at a rapid pace of 9-10%? And was it not clear that all this would end in failure?

In hindsight, of course, now we can say that the growth rates of 3-4% annual growth would be sufficient. However, countries like Poland also grew strongly during that period. However, one thing would then be quite possible: more states should have tried to join the eurozone more quickly. A consequence of this for the entire region as a whole would be a significantly higher level of stability. Then we would not have to deal with many problems at all. And that should be the goal in the future.

Does the ECB play a prominent role in this region?

Of course, but indirectly. The ECB helps Western European banks with liquidity and thereby fights the crisis. Western European banks are the dominant credit institutions in the eastern part of our continent. Thus, indirectly, the support of the ECB of the eurozone banks extends to Eastern Europe.

– Is there anything else that could help?

An important role will be played in the future by new regulations for the preparation of financial statements by banks. Now a number of changes are expected, which in the end, of course, will have consequences for providing banks with capital. We must get concrete results before the end of this year.

Banks of many countries of Eastern Europe practiced the provision of loans in foreign currency. Now they are facing a wave of defaults, as due to the crisis, borrowers are not able to pay interest. Should the issuance of loans in foreign currency be prohibited?

Take a country like Hungary. There really were too many loans issued in euros, dollars and Swiss francs without appropriate guarantees. However, I do not believe that a ban on the provision of loans in foreign currency would be the right measure. The countries of Eastern Europe even now do not have their own sources of capital that would ensure them continued economic growth in the coming years. Therefore, now we need a carefully balanced financial system in which all new phenomena and the changes that have taken place would be taken into account. Of course, capital will continue to come from outside, however, on the other hand, the countries of Eastern Europe themselves will have to save more in order to subsequently have a sufficient supply of funds.

The EBRD provides direct capital assistance to Eastern European banks. Do you intend to fund and takeover? So, for example, the European Union requires the German bank BayernLB to sell its subsidiaries in Eastern Europe.

In my opinion, in the near future this is irrelevant. Banks that could possibly sell their Eastern European subsidiaries should carefully study this issue. At the moment, the crisis and its consequences are in the foreground. I believe that the topic of the sale of subsidiary banks will become relevant no earlier than in three to four years. Therefore, it is difficult to say now whether the participation of the EBRD will be necessary at all in that situation.

Will the EBRD itself have sufficient capital for effective assistance in Eastern Europe?

I think that our control bodies this year will once again raise the upper limit for investment. Then in 2009 we could invest about 8 billion euros, which is 50% more than in 2008. Next year, our funds will also amount to about 8 billion euros.

Can you predict when Eastern Europe will come out of the crisis?

The first countries to cope with the crisis will be the states of Asia. Behind them, perhaps the Americans. Judging by current trends, Eastern Europe will sooner be at the end of this timeline.

In Eastern Europe, Austrian banks are very active. At the beginning of the year, Germany was often criticized in Vienna for allegedly misrepresenting the crisis potential of this region. Has anything changed in this regard?

In any case, today Germany is one of the most active forces operating in this region. The authorities of Germany realized that it was necessary to provide assistance. Perhaps German banks are represented in Eastern Europe and not so much, but there are very active trading and industrial companies from Germany. Based on this, it is clear how high Germany’s interest in the quickest recovery of the economy of Eastern Europe is. Without pressure from the Federal Republic of Germany, billions of packages of aid to Eastern Europe would not exist at all. Germany’s position is characterized by the fact that the government in Berlin is stronger than other countries, striving to maintain public debt at a low level.

Perhaps, this or that program of revival of a conjuncture would be useful all the same?

I believe that everything is being done right now, and this approach is connected with German history. It is precisely in view of the painful experience of several hyperinflations that the German public debt issue is more cautious than anywhere else. In other countries, it’s a different experience, and, accordingly, the attitude is calmer. However, despite all this, Germany will be able to ensure decent growth in its national economy.

And how are things in Latvia? Does the situation there continue to escalate?

Indeed, Latvia seriously bothers us. From the perspective of macroeconomics, there now, first of all, the help of the IMF and the European Union is required. We, as the European Bank for Reconstruction and Development, of course, also want to help Latvia within our capabilities. And despite the fact that this is a small economy, we are very attentive to this country. For the rest, I proceed from the fact that the Swedish banks that are strongly represented in the Baltic States fulfill their obligations and continue to supply the Baltic states with sufficient capital.

– What would happen if the richer Western Europe didn’t help the poorer East Europeans anymore?”

In view of the crisis in the real economy, I would like to warn against premature optimism. We must be prepared for the fact that we still have to face truly serious challenges. One thing is clear: in order to avoid serious social tensions in Eastern Europe, it is necessary to deal with the crisis with maximum energy.

So what exactly is waiting for Eastern Europe?

In any case, we should expect an increase in the volume of defaults on loans. The number of bankrupt enterprises will increase, which means increased unemployment. At the same time, for relatively poorer Eastern European countries, the financing of state budgets will turn into a problem. In the future, these countries should change the structure of their exports in order to sell more high-tech products and services abroad.

How do you see the near future of this region?

Well, we will probably not see very high, double-digit indicators of economic growth rates soon. At the same time, investment volumes are declining, and capital inflows from abroad cannot reach the previous level. Our urgent task will now be to put economic growth in Eastern Europe on the path of constant and long-term development. Eastern Europe has enormous potential, this should not be forgotten by anyone. Of course, the current crisis is a serious brake, but if you look at how much has been done in these countries over twenty years, you can only be optimistic about the prospects.

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