By Mark Johnson
As speculation mounts over a possible EIB takeover of the EBRD, doubts about the latter’s future overshadow its leadership succession
The European Bank for Reconstruction and Development goes into its annual meeting in Kiev with its finances and operations in rude health, a president bowing out to plaudits, a promising successor in place – but with renewed doubts over its future.
“The EBRD won’t survive in its current form,” says one banker involved in the central and eastern European region who, like most people interviewed for this piece, declined to be identified. “Change is a question of when, and how, not any longer why.”
The immediate focus of this latest debate: a leaked discussion paper placed before EU finance ministers meeting at the Ecofin Council in Brussels on March 4. The options outlined there included closing the bank or merging it with the European Investment Bank (EIB).
The response was immediate. German finance minister Peer Steinbrueck described a proposed merger as “totally wrong”. Polish finance minister Jacek Rostowski said, “It would not be prudent to put together two well-functioning institutions in the hope that they function better.”
Jean Lemierre, outgoing president of the EBRD, argues that debate over his institution is nothing new. “In 2000, the critics of the bank were more vocal than today,” he tells Emerging Markets. “All of this has to be put into relative terms.”
Private-sector bankers have long argued that the bank treads on their toes in the region. That argument has gained in intensity as the countries of central and eastern Europe have moved through the transformation process from ex-communist shell economies to fully-fledged market economies. “The bank has done a good job in difficult circumstances,” says one banker close to the institution, “but there comes a time when you have to say goodbye.”
Dividend debate
Underlying this external debate has been a simmering row with key shareholders about the bank’s dividend policy. The US – with 10% of the EBRD’s capital, the largest shareholder – argued that the bank should distribute a dividend from record 2007 profits of E2.4 billion.
That particular disagreement has simmered down: Lemierre points to an agreement with shareholders to put 80% of 2008 profits into the reserves, 10% into a special fund to support the bank’s operations and the balance into a fund dedicated to the continuing clean-up of the Chernobyl nuclear power station in Ukraine.
Lemierre further argues that the bank’s policy on its geographic focus is clear: it will shut up shop in countries where its job is done, steadily transferring its centre of areas of operations south and east.
“We have already closed our office in the Czech Republic,” says Lemierre. “And we expect to close in the other countries that joined the EU in 2004, by 2010.” New business has shifted accordingly: 40% of new EBRD lending is already in Russia.
When the EBRD was founded in 1991, not long after the fall of the Berlin Wall, its mandate was clear: to encourage economic transformation in the countries of central and eastern Europe.
Ownership
One mark of the success of that project was the palpable sense of ownership demonstrated in the recent discussions over the future direction of the bank and the appointment of the new president. Central European countries were unanimous in their desire to keep in place an institution that – despite its largely externally-held shareholder structure – they had come to regard as their own.
That sense of ownership seems to have survived the nomination of Thomas Mirow, state secretary in the German ministry of finance, as the next EBRD president. That was in the face of competition from three candidates from the region – Gyorgy Suranyi, former Hungarian central bank governor, Zdenek Tuma, governor of the Czech central bank and Yannos Papantoniou, ex-Greek finance minister.
If, when, Mirow takes up his post, he will in theory have two years to make his mark: EU finance ministers have agreed not to revisit the issue of structural change until 2010 – the date set for shareholders’ regular review of the EBRD’s capital structure.
But it is clear that the long-running debate over the future of the EBRD has taken a new turn: merger with an institution such as the EIB provides the option of continuing the bank’s mandate within a different institutional framework. The debate over the future of the EBRD is no longer binary.
The official position of the EIB is that any such tie-up is “not on the agenda” – even after an EIB official told reporters he favoured that option in a contribution the Luxembourg-based bank later dubbed personal. “It’s true that one day we will have to think about a rationalization,” says EIB president Philippe Maystadt. In reality few doubt that the issue will lie in cold storage until EBRD’s 2010 capital review.
The two institutions are already beginning to cooperate in regions such as the Balkans. The EIB has 3% of the EBRD’s stock – a holding that gives them a seat on the board.
The specific framework mentioned in the document circulated to EU finance ministers involved creating a joint holding company for the shares of the EIB and the 66% of EBRD shares held by the EU. That would in theory create a mechanism for more closely aligning the activities of the two institutions.
There are precedents: “The IFC works perfectly well as a subsidiary of the World Bank group,” points out one official at a supranational institution. That is not likely to be a model that many in the EBRD would welcome.
EBRD staffers have other worries, too. They argue that the differing cultures of the two institutions would make the marriage an unhappy one. The EBRD embraces risk; the EIB shuns it. The EBRD is a London-based institution, open to the ideas and business practice of the private sector; the EIB is firmly rooted in the Francophone origins of the EU itself. While the EBRD looks outward to the countries it serves, the EIB has one master – the EU. The EBRD is about transforming economies; the EIB is about old-fashioned lending for things like roads and railways.
Even EIB insiders concede these arguments have some validity, but say the picture is changing. For a start, the demarcation lines between the two types of operations are blurring. To be effective, infrastructure development should march hand-in-hand with the encouragement of financial deepening, for example. Any bundling of operations under a new institutional framework would only involve the outward-looking external operations of the EIB.
EIB changes
The EIB itself is no stranger to questions over its purpose, having come under attack earlier this decade for its rapidly-swelling balance sheet and a claimed lack of political oversight.
Those criticisms stung the EIB, say insiders, and promoted change. They argue further that the advent of new countries into the Union – firstly from the Nordic region, then from central and eastern Europe – have changed the culture of the institution. Despite its Francophile groundings – and the use of French as an official language – the EIB has increasingly (if slowly) become a little more Anglo-Saxon in its attitudes.
That shift extends to attitudes towards risk. “Over time, the EIB is getting ready to take on more risk which, from the beginning, has been the characteristic of the EBRD,” says one banker familiar with the inner workings of both institutions over the years.
“At the EIB the younger people are probably more aware of the need to take on risk.” He adds the emphasis on the quality of risk control, which extends back over a decade in the EIB, might be something the institution could bring to any joint venture, however structured.
At the institutional level, a reordering of the shareholder structure of the EBRD offers another advantage: it provides the perfect moment for any non-EU EBRD shareholders wishing to step off the train to do so. To date, only Australia, a 1% shareholder has signalled its intention to do so.
In the meantime, though, the debate over the future of the EBRD is certain to continue, and to be complicated by continuing tensions between its shareholding structure.
Take the case of Turkey. The country applied to be a country of operation for the EBRD in late-April. The US, a long-time ally, is keen to see Turkey bound in further to the West by receiving EBRD loans. The region’s major economy would seem a plum prize to the EBRD as it seeks to prove it has a stand-alone future.
But the countries of the EU are mired in uncertainty and disagreement about their attitude towards Turkey’s application for membership. That, in turn, complicates the bank’s attitude toward the country.
As ever, the bank is finding that operating on frontiers rarely makes for an easy life.