Financial crisis dispels doubts over EBRD future

LONDON (Reuters) - Doubts over the European Bank for Reconstruction and Development's (EBRD) role in eastern Europe have now been silenced by the global financial crisis that has engulfed countries within its remit.

Earlier this year, some of the EBRD's shareholders -- including its largest, the United States -- argued that the rapid economic growth of former Soviet bloc members such as Poland and Hungary meant the EBRD's role in fostering private sector investment had diminished.

But the purpose of the development bank, established in 1991 to help former Soviet bloc countries make the transition to market economies, has been reinvigorated in recent months.

"I don't hear those questions about the (EBRD's) future any more. There is a real role for the EBRD to help these countries get through this difficult period," EBRD Chief Economist Erik Berglof said on Tuesday.

The EBRD said last week it would reverse the recent decline in investments to central Europe and turn its attention back to economies once seen to be on track for graduation from its lending programs.

Having gorged on foreign financing during the boom years, many of these economies have been hard hit by the credit crisis sparked off by souring subprime mortgage debt in the U.S.

The London-based bank has forecast that the region's economic growth would halve to 3 percent next year amid falling consumption and rising unemployment.

Belarus, Hungary, Serbia and Ukraine are among the transition countries that have sought help from the International Monetary Fund (IMF).

"Given the scope of challenges faced by the region and the massive requirements for its regenerating growth, the EBRD seems to have its work cut out for the next five years at least," said Vanessa Rossi, a senior research fellow with the International Economics program at London's Chatham House.

COMMERCIALLY ORIENTED

While the IMF is focused on helping countries with their balance of payments, the EBRD as a commercially oriented lender is better placed to help mitigate the impact of the financial crisis on private sector investments, analysts say.

As private sources of financing dry up, the EBRD will play a more prominent role in its 29 countries of operations as one of the few channels of foreign credit left.

"There will be countries that don't require IMF help but will find it hard to raise financing. Partial guarantees provided by the EBRD on project financing can often bring in other investors," said Rossi.

The bank said last week it would raise its investments in the region to as much as 7 billion euros next year to help its creditor countries cope with the financial crisis.

Taking into account additional funding from its commercial partners, this could mean EBRD-led financing could top 20 billion euros next year.

"Though the absolute financing is not huge compared to the region's needs, any financing is welcome until we see a resumption in capital flow," said Dmitry Guorov, an economist at UniCredit.

The EBRD's investment efforts next year are likely to be focused on sectors such as infrastructure and banking, which are seen particularly at risk from the constriction of credit.

The institution, which is a shareholder in around 100 financial institutions and a creditor to a further 200, has already pledged support for its partner banks.

Meanwhile, the organization's geographical remit -- the subject of debate this year after its decision to start funding Turkey -- is likely to remain stable for the foreseeable future.

"There is plenty to do as it is and their capital base isn't large enough," said UniCredit's Guorov.

(Reporting by Sebastian Tong ;)