World Bank To Offer Aid to Eastern Europe

By Annys Shin
Washington Post Staff Writer
Friday, February 27, 2009

The World Bank and two European development banks are expected to announce today in London that they will provide $31 billion over two years to shore up ailing banks and businesses in Eastern and Central Europe, attempting to forestall a financial meltdown that also threatens the stability of banks in Western Europe.

The World Bank is partnering with the European Bank for Reconstruction and Development and the European Investment Bank to provide equity and debt financing, credit lines and political risk insurance to Eastern and Central European banks and businesses.

The EIB is the lending arm of the European Union. The London-based EBRD was created in 1991 to support private sector development in Central and Eastern European countries and the former Soviet Union and now includes nations such as Egypt and South Korea.

The announcement follows recent warnings by World Bank President Robert B. Zoellick that the economic and political gains Eastern and Central Europe have made in post-communist decades could be destroyed if their richer neighbors to the West don't do more to help them.

"This is a time for Europe to come together to ensure that the achievements of the last 20 years are not lost because of an economic crisis that is rapidly turning into a human crisis," Zoellick said in a written statement.

German officials appear to have overcome their initial reluctance to send bailout money to Eastern Europe and said earlier this week they would be willing to work through the IMF to send more aid.

Germany's change of heart is part of a growing acknowledgment among leaders in Western Europe that a financial crisis in the region could spill over into their own countries.

Because of the global slowdown, many countries in Eastern and Central Europe are suffering a painful economic reversal after years of robust growth. Demand for exports has fallen precipitously. Foreign banks, many of them based in nations such as Austria and Sweden, invested heavily in the region and have been forced to pull back in part because of bad loans made at home.

Exchange rates in Central and Eastern Europe have also tumbled, exacerbating the debt burden of governments and home owners alike. If they default, Western European banks would likely feel the pain in short order.

The International Monetary Fund has helped forestall a financial meltdown by providing tens of billions in loans to Latvia, Serbia, Belarus, Ukraine, and Hungary. But analysts and European policymakers think they will need more.

Under the two-year plan to be unveiled today, the EBRD will provide about $7.6 billion for the financial sector in the form of equity and debt financing to banks and directly to small and medium-sized businesses. The EIB will provide about $14 billion in lending to businesses. The World Bank Group will provide about $9.5 billion of lending, equity financing and political risk insurance.

Although the amount pledged by the World Bank, the EBRD and the EIB is probably not enough to end the crisis, "it's a good start," said Morris Goldstein, a senior fellow with the Peterson Institute for International Economics. "You're going to need money from a lot of sources to deal with the Eastern European banking problem."

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