International lenders will support eastern Europe with more than 30 billion euros ($38 billion) in the next two years to shield it from the impact of the euro area’s debt crisis, mimicking a plan they implemented in 2009.
The European Investment Bank, based in Luxembourg, the Washington-based World Bank and the European Bank for Reconstruction and Development in London today agreed on an action plan for the region, they said in a joint statement. Under the plan, they will loan to and invest in private and public-sector projects including infrastructure, corporations and the financial industry, they said.
While the situation in the region isn’t as bad as three years ago, “we still see capital outflows, particularly from banking sectors,” William Jackson, a London-based economist at Capital Economics Ltd., said in a phone interview. “It’s not the same urgency to put a lot of money on the table as in 2009 and we are quite surprised at the size of these numbers.”
Eastern Europe has been hit by the slowdown in the euro region, its biggest export market and main source of investment and bank financing. Exports have fallen “significantly” in most countries in the region in recent months, the EBRD said last month. Western European lenders have continued to cut capital and funding in the east, where they own about three-quarters of the banking industry.
Economies in eastern Europe risk becoming “collateral damage” in the euro-region debt crisis as western banks withdraw funds and the currency union’s recession undermines growth, EBRD President Suma Chakrabarti said in Warsaw Oct. 18. While the “most disruptive scenarios” have been avoided, “a steady outflow” of funds from the region persists, he said.
European lenders may need to sell as much as $4.5 trillion in assets through 2013 should policy makers fail to stem the crisis, which would leave countries in central and eastern Europe the most vulnerable in the world, the International Monetary Fund said in a report on Oct. 10.
Eastern European economies will expand at half last year’s pace in 2012 because of worsening economic prospects in the 17-nation euro area, the EBRD said last month. The 29 eastern European and central Asian countries where it invests will grow 2.7 percent this year and 3.1 percent next year.
“The on-going economic and financial instability in Europe continues to threaten growth and jobs, particularly in central and southeastern Europe,” World Bank President Jim Yong Kim said in today’s joint statement. The lenders’ plan seeks “to help these countries cope with the impact of the continued euro-zone crisis,” he said.
The EIB will provide at least 20 billion euros under the plan, mainly in long-term loans addressing areas such as promoting small businesses, energy projects and innovation, according to the statement. The World Bank pledged 6.5 billion euros to sectors including banking, infrastructure, manufacturing, agriculture, services and trade. The EBRD may invest 4 billion euros in loans, equity and trade financing “to facilitate regional integration and export-led growth,” according to the statement.
The three international lenders pledged 24.5 billion euros of loans and investments to prevent a banking-sector collapse in eastern Europe in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy. They eventually disbursed 33 billion euros.
“These countries have made important adjustments in fiscal and current accounts, increased domestic savings and improved bank balance sheets,” according to the statement. “Restarting and consolidating growth is imperative as the economies strive to narrow the gap in living standards” with western Europe.
The financial support will be provided to Albania, Bosnia Herzegovina, Bulgaria, the Czech Republic, Croatia, Estonia, the former Yugoslav republic of Macedonia, Hungary, Kosovo, Latvia, Lithuania, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia.