The World Bank is ready to give east European countries backing that would allow them to withstand shocks coming from Europe’s debt crisis and ease their reliance on bailout funds, a bank official said.
The Washington-based lender, which approved a 1 billion-euro ($1.26 billion) three-year precautionary loan to Romania on June 11, is in preliminary talks to arrange the backing of Croatian bonds and may provide technical support to Hungary once it reaches a bailout-loan agreement with the IMF and the European Union, Peter Harrold, the bank’s director for central Europe and the Baltics, said in a June 12 interview.
Romania, Ukraine, Serbia, Hungary and Latvia have all taken International Monetary Fund assistance in the past three years to help them through the crisis. IMF loan programs outline measures such as spending cuts and public-sector wage reductions that officials need to adopt to receive aid. Governments in some of these countries have fallen because of the unpopular moves taken to adhere to the terms of the credits.
Romania’s loan “fits very well in the region” and “it could well be an example for this sort of arrangements,” Harrold said in Bucharest. “Moving from a situation where the IMF is really in the kitchen to a situation where they are very much helping you with a much lower profile on a precautionary basis, as an anchor and not as your controller, that’s a good thing. It reflects the move along and this is very much in keeping with that approach.”
Eastern Europe, the hardest hit region in the world after the 2008 collapse of Lehman Brothers Holdings Inc. froze global credit markets, is trying to shield itself from possible contagion from an escalation of the European sovereign-debt crisis through banking and trading channels. Emerging Europe is the only region in the world where international banks own the biggest share of the domestic banking industry.
Harrold said the AAA rating of the bank, which has already backed bonds issued by Macedonia, Montenegro and Serbia, may also help lower Croatia’s borrowing costs with its possible guarantee for euro-denominated bonds, pending fiscal adjustment in the country. The Adriatic nation needs to reduce its budget deficit, which is the same as two years ago, and pursue fiscal adjustment measures, he said.
“Countries like Serbia and Croatia are facing very high financing costs indeed,” Harrold said. “Doing bond issuance or borrowing, because it can be a loan as well, with the backing of the bank can have a very sharp impact on costs and it can be very good.”
The cost of insuring against a default by Hungary increased to 569.6 basis points at 2 p.m. in Budapest, after declining to as low as 497 basis points on May 7 this year, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The credit-default swaps of Hungary are higher than those for neighboring Romania which stand at 436.3 basis points and also exceed those of Croatia of 528.7 basis points.
The World Bank is “in very gentle discussions” with Hungary now to support reforms and provide reassurance “for critical elements of the financial sector,” Harrold said.
Hungary, which requested IMF aid in November and has been delaying the approval of measures needed to start the talks, can’t access resources from the World Bank except under exceptional circumstances because it has already graduated from an IMF loan program, Harrold said.
“There’s been no suggestion that the World Bank should have another financial relationship with Hungary, but we have discussed with Hungary the possibility of certain types of involvement,” he said. “We’re seeing if, for example,” the bank might help small Hungarian companies access funding “in the context of a new arrangement with the IMF and the EU. Everything is a very long way away.”