EBRD kicks off capital review amid member criticism

By Sebastian Tong

LONDON (Reuters) - EBRD shareholders on Saturday decided to bring forward a planned review of the development bank's available capital as some countries criticised its lending practices for leaving eastern Europe and Central Asia exposed to the global financial crisis.

The European Bank for Reconstruction and Development (EBRD) also faced shareholder calls at the end of its two-day annual meeting to re-examine its role in helping former communist countries make the transition to market economies following the credit crunch that has savaged its 30 countries of operations.

"There have been some preliminary debates about what is the sustainable business volume for this bank, how do we cope with risks and what could this mean for a possible capital increase," EBRD President Thomas Mirow told reporters.

"There was not a broad consensus," he added.

The lender's 63 shareholders will decide on whether to increase the bank's capital at next May's annual meeting in Zagreb instead of 2011.

Some members appear to favour an EBRD capital increase while others said the lender could explore more efficient methods of utilising its current capital of 20 billion euros.

"Many have said that any discussion about the possible necessity of a capital increase should not be entertained in (the light of a) crisis response but (taking into account) the mid-term needs of the bank," Mirow said.

The EBRD, whose total investments stood at about 43 billion euros (38 million pounds) in March, has said it would spend a record 7 euro billion in investments this year in sectors ranging from banking to infrastructure to help the region cope with the deepening economic slowdown.

Mirow said there was no decision yet on next year's investment volumes but said the EBRD had capacity to lend as much as 8 billion euros.

CAUTION, CRITICISM

Major shareholders, such as the European Union, said the bank had to be mindful of financial risks as it scaled up its lending activities, cautioning it against further expanding its operations.

"On account of the EBRD's strong exposure to the private sector, the high share of equity in its portfolio and the considerable country and sector concentration in its activities, the recent unfortunate developments are certainly affecting the bank's capacity to bear further risk," it said.

Earlier this year, the lender adjusted its gearing ratio to free up more available capital for its investments.

Japan, another large EBRD contributor, said the lender had exposed the former Soviet bloc to "excess risks" by helping to privatise banking sectors in these countries without ensuring the development of domestic capital markets.

"While market economies actually took root in the region, they have turned out to be neither sound nor sustainable after all," Shinsuke Suematsu, Parliamentary Secretary of the Ministry of Finance told fellow governors at the EBRD's annual meeting.

"(The) introduction of markets or development of private companies as market players alone cannot bring about long-lasting stable economic growth," he added.

This rare criticism from Japan came as some shareholders continued to question the EBRD's longer-term mandate and remit.

South Korea urged the bank to provide a "vision" on its geographical scope of operations, saying communist North Korea could be a recipient country once it decides to transform itself into a market economy.

Australia, which has previously threatened to withdraw from the organisation, said it remained "concerned about the lack of a clear long-term mandate" for the EBRD."

Some of the EBRD's recipient economies, such as Poland and Hungary, had planned to graduate from its lending programmes, spurring an expansion by the lender beyond its original emerging European remit into countries such as Turkey and Mongolia.

But the deepening economic crisis has put these graduation plans on hold and halted the EBRD's eastwards expansion.

Mirow said EBRD shareholders agreed that the crisis should not derail the longer term goal of graduation for the countries of central Europe but said the discussion "on what a post-graduation phase might mean for those countries" would have to begin after their economic recovery.

(Reporting by Sebastian Tong; Editing by Mike Dolan)

Article Published: 16/05/2009