OCE Press Conference

MR ANTHONY WILLIAMS (EBRD): Good afternoon, everybody. Thank you for waiting. You have a statement from Erik which we have put out. That is free for use whenever you would like to use it.

Erik will briefly introduce the subject, the crisis response and the next steps. I will hand over to him for a brief statement and then I will take your questions. Thank you very much.

MR ERIK BERGLOF: Thank you, Tony, and welcome to this press conference. I think this is definitely a time of great uncertainty, in the world and in our region. As you know, we came out last week with our forecast, which at the time at least was at the lower end of the forecast. It was pretty much a more dire view of the situation in Russia based on the first quarter’s numbers. As you know, now we have the first quarter’s numbers from several countries. They are pretty much in line with what we expected. What is different now is that for the first time in a long period there are some upside possibilities as well. While the negative news continues to arrive, there is also for the first time an upside.

Having said that, of course we do not necessarily want to subscribe to this view of a lot of green shoots around. We should not have any exaggerated the expectation that this crisis will go away very quickly. We know from history that financial crises, unlike regular recessions, tend to take quite a long to recover from. We should have some realism when we look at the signs in the region. At the same time, it is very encouraging that we have not seen any of the traditional emerging market crises, the twin crises of a collapsing banking system and a collapse in exchange rates. I would argue that this is very much the result of the rather mature and positive policy response, both in western Europe and, I would argue, internationally. In western Europe we have seen, very importantly, broad programmes to support the banks that are active in our region. That is critical because, as you know, these banks are very important to the funding. As other sources have dried up, particularly as bond markets and syndicated lending has dried up, bank funding, while reduced, is still very important to the region.

We have also seen very strong support and policy response at the international level. Perhaps, most importantly, we have seen strong statements and to date at least consistent behaviour in the sense of not taking protectionist measures. We were particularly worried about protectionist measures when it came to the financial system and the banks. These aid packages that I have said were so important for the western banks have not been restricted in their usage in our region.

The G-20 process has been positive by providing a sense of stability to the region, particularly through reinforcement, resources to the IMF and promises of increased capital to development institutions. The EU’s doubling of its balance of payments support is very important. I also want to emphasise that what the IFIs have done together in the joint IFI Action Plan with which many of you are familiar and the Vienna Initiative is to try to put substantial amounts of capital into the region and also to take a step forward to promote the coordination that was needed to secure continued engagement of the banks.

May I emphasise that in no way are we out of the woods. We have yet to prepare ourselves for the effect of the downturn, the numbers that we have seen, on the banking sector in the region. The first shock was the combined shock of a drop in exports and a shutting off from international capital markets. Now we also have to brace ourselves for the impact on the banks in the region from slower economic growth.

We need to think more long term about how we adjust the corporate sector both to the crisis world but also to the post-crisis world and the need to adjust to more expensive capital, to different risks. That is an important role for EBRD. We know that the foreign exchange exposure was a very important reason for the vulnerability of many countries in our region. We need to try to address that in different ways. Of course part of that is building well-functioning local currency markets in those countries that do not have any immediate prospects of joining the euro.

I also want to make a plug, if you like, for the need not to forget the long term, the need to use the crisis now to invest in long-term diversification in the countries that are now seeing what it means to be overly dependent particularly on commodity exports. More broadly, there is also a sense that maybe some countries have become too exposed to individual industrial sectors as well. More broadly, it is important to build now the human capital that is needed to be competitive in the long run.

On a final note, the one thing that we are seeing now unfortunately across the region, in some countries more than others, is that this private sector crisis is turning into a public sector crisis and there is a collapse in tax revenues. I think that is something we need to be prepared for and what that means in terms of both meeting fiscal gaps in the region but also making sure that this does not crowd out the private sector’s access to capital.

With those remarks, I am happy to take your questions.

MR WILLIAMS: Please identify yourselves for the transcript.

MR ANDREW WALKER (BBC): Mr Berglof, obviously the performance of western European economies is terribly important for those with whom you deal. I wonder if you have had a chance to digest the new GDP figures that came out this morning, in particular Germany’s 3.8 per cent quarter-on-quarter contraction. Could you reflect on the significance of that and indeed the importance of western Europe to prospects in your region.

MR BERGLOF: They are hard to digest. We knew them and we have seen these kinds of numbers for some time now. We are not coming completely unprepared for them. It is important, as I said before, that the region is very dependent on exports, it is very dependent on the capital that is coming through the financial integration, and so these numbers of course are not positive news.

Having said that, I think some of the adjustments that are needed have already taken place and hopefully we will see the possibility of restructuring in the region, as I said, in the corporate sector. Of course what has happened is that they have become linked through the value chain. Particularly in some sectors such as the car industry and so on, the countries in our region have become extremely interlinked. These numbers are not good news but there is also great flexibility in the region to try to respond to this.

MR ROBERT (CUTS)* (Hungarian News Agency, London Bureau): Mr Berglof, you mentioned earlier in your presentation the encouraging signs that elements of previous emerging markets crises like the banking collapse are absent in the current crisis. Does that mean that you think that these elements have now been averted or stopped from emerging for good?

MR BERGLOF: I am sure that has not happened for good but I tried to emphasise these policy responses that we have seen, and of course in the case of Hungary I think the IMF programme and the contribution from the European Union has been important in stabilising the situation. I think there was at some point some concern that maybe the IMF would not have sufficient resources; that is where the G-20 process has been quite helpful in giving some comfort that it is not going to happen immediately but if there is real pressure, there will be sufficient resources.

I also think that other international financial institutions have managed to reorientate themselves. I am now speaking about EBRD: if I look at what we are doing today and at what we did perhaps six months ago, there has been a very dramatic change. I think that shows that these institutions were created to address these needs and hopefully we will show that the initiatives that have been taken will prevent these kinds of crises.

MS DANIELLE (WODGE) (Politika, Belgrade, Serbia): I would like you to give us the current status of this global crisis within the region of central and eastern Europe. You say that the worst-case scenario has been avoided and the World Bank estimates that the number of poor and vulnerable people in the region will rise by 5 million for every 1 per cent of decline in GDP and that in the banking sector and on the ground we do not exactly see a balanced picture. How do you put those two things into one picture?

MR BERGLOF: First of all, I did not mention and I should have done so that it is important to remember that even though we may see some stabilisation in GDP numbers, the unemployment numbers will continue to worsen for a long time. That is another thing we absolutely need to brace ourselves for. Of course that makes it even more important that we can deal with the problem of access to finance for the real sector for those companies that can employ people.

I am not in any way belittling these numbers. I think these are very real numbers and I would subscribe to the estimates of the World Bank. I was saying that it could have been even worse. We have avoided the cataclysmic events that we have seen in emerging markets. There was a typical pattern of many emerging market crises. I think it is remarkable, and that is what my remarks were meant to convey, that we have not seen that so far. You could argue about the reasons for that but it is a fact.

MR RAYMOND LLOYD (Editor, Parity Democrat, Westminster): The current economic downturn seems to have been started off in many older democracies with excessive consumerist debt, financed in the short term by savings in east Asia. How far has this imbalance affected the EBRD countries and what is the Bank doing to promote savings?

MR BERGLOF: It is fair to say that the way the region has grown has been through importing capital. I think that was healthy. The region imported capital from another part of the world, mostly western Europe, that had more capital from capital-rich countries. That is what we wanted to see. It is true that a lot of this went into consumption. Again, you have to remember where these countries came from. There was a lot of pent-up demand for very basic things such as housing, cars, and so on. I think that was what these economies responded to. It was supported by the financial sector that expanded and developed very quickly in the region. That was true not only for our region but for much of the world. We became a bit too complacent about risks; there was some excitement about allowing the financial system to reach even further out. We saw it, of course, in the United States, in allowing people to buy properties, and so on. I think this was a healthy development, on the whole. Maybe it went a bit too fast. When we go back and look at what can be done in terms of changing regulation and supervision and what can be done to put better risk management practices inside the banks that we work with, I think that will come from the lessons that we have drawn from this crisis.

QUESTION: Promoting savings in eastern Europe?

MR BERGLOF: Why do people save? People save for when they fall ill and when they grow old. I think that well-functioning pensions systems and good health care systems need to be put in place, and we also need to encourage savings behaviour. Of course, what is very good for savings is stronger development of capital markets and offering more options for people who want to save in the economy. I think we need to make sure that in this crisis we do not throw out the baby with the bathwater but ensure that these options still exist and multiply.

HANDLESBLATT (Germany): You mentioned in your statement the danger of accession fatigue. Is it not, rather, that the existing eurozone members are wary of taking on countries with high fiscal deficits?

MR BERGLOF: I think this accession fatigue predates the crisis. If I were to characterise the region prior to the crisis, the fiscal issue was not at the top of the list apart from in a few countries. I think accession fatigue has other roots, though it may now sometimes be expressed as complaints about large fiscal deficits. I was at the 10th anniversary of the euro, where there were discussions about trying to introduce new criteria based on the quality of the financial systems in the applicant countries. I think these are the kinds of things that create uncertainty about the accession path. Of course, for some countries accession is very far away and does not have much effect on decisions today, but for some countries this is very immediate. I have just returned from discussions in the Nordic countries about the Baltics, for whom this is a real option to come in quickly. They have to take very difficult decisions in the short term but this is probably the way out for them. When we introduce new criteria or have discussions about whether they should be let in or left out even if they meet the criteria, we need to provide strong signals that, if they meet the criteria, they will be let in. I think that that is the main message.

MONITORUL (Romania): I want to refer to Romania as a study case. Recently the National Institute of Statistics has shown a decrease in GDP year on year in the first three months of this year of 6.4 per cent; also the current account deficit has shrunk 82 per cent in the same period and the foreign direct investment has decreased over 13 per cent. How do you see the situation and what measures do you believe it would be appropriate for the government and the National Bank to take, given this scenario?

MR BERGLOF: I am familiar with those numbers. It is no comfort, but unfortunately they are the kinds of numbers we are seeing in many countries. What is helpful is the fact that there is now a programme with the IMF and the European Union which I think creates stability, particularly around the financial system. We have worked very closely with the IMF on this programme. One aspect of the current crisis is that it is a private sector crisis and, of course, the IMF was not set up to deal so much with the private sector. If we have had a role in getting commitment from the financial sector to stay involved in Romania, that is important for dealing with this issue, getting capital out into the real economy and making sure that adjustments in terms of leverage in the banking system and responses to drops in demand take place in an orderly way, and I think that that is particularly important in Romania.

MR PHIL THORNTON (Emerging Markets): I wonder if I could ask you to elaborate on your point about the public sector crisis and whether that is the next leg in the crisis? Have you looked at which countries are most likely to be affected? Do you think that the policies being run by the IMF and others are the right ones?

MR BERGLOF: We know from experience that one of the main casualties in this kind of financial crisis is the fiscal balance. It comes primarily from the drop in revenues. The costs of the bank bail-out have not usually been the major issue; the main cost is on the drop in revenues. We see that in some very dramatic ways in our region. It is quite dramatic in Ukraine, for example. It comes from essentially two sources. One is that Ukraine has gone in a very short time from having a large current account deficit to now being in surplus in its current account, meaning that it lost a lot of revenues. This adjustment came through a very dramatic cut in imports, and import tariffs had been a substantial source of revenue. There was then also a fall in tax revenues from lower growth. Some countries are more affected than others and some countries may not have so much buffer in terms of dealing with this.

Having said that, I think the region as a whole came into the crisis in a relatively healthy fiscal state, having done a lot to get rid of some bad behaviour from previous periods. The region entered the crisis with, in the main, a strong fiscal stance. What we worry about is that they will come out of this with a much weaker fiscal stance and, if that is not addressed, it will sow the seeds of a future crisis. As long as we are attentive to this for the countries that are most immediately affected and find ways of filling those fiscal gaps, I think we shall be fine.

QUESTION: Should the ECB do more to stabilise the situation in the CEE countries, especially for the non-euro members and also for non-EU countries?

MR BERGLOF: The short answer is yes. One thing we should remember is that the ECB is doing a lot at the moment in terms of supporting the western European banks – and I mean a lot. Without the ECB providing liquidity, we should be in a very different world. That is the good thing.

We should like to see more action. There are some encouraging signs but maybe the movement is not as quick as some of us would have liked. We should like to see more action in terms of doing the kinds of things they have done to support some non euro members in the past, such as Denmark, in providing swap lines in local currency. They have provided repo facilities – we are getting into technicalities here – to Hungary and Poland. I think they could go further and do similar things, such as they have done in countries like Denmark.

We understand that this is not something that could be done across the board; each specific case has to be looked at. I think there are some very good candidates. As you probably know, there have been some approaches from those likely candidates, and we should certainly like to see those approaches being received positively.

MR JOE PARKINSON (Dow Jones Newswires): Following on from that, do you think it is wrong for the ECB not to accept central and eastern European currency collateral securities as part of its liquidity window? What is your reaction to that?

MR BERGLOF: I am less certain about that. I think the ECB should move in that direction. I was commenting more on the swap lines. That is an issue I have looked at more carefully. What is positive is that there is now a process inside the ECB to consider these things case by case and not be locked into a notion that they are inconceivable. I think that that was the response that they provided to the letter from the Governors in some of our countries: “We look at this on a case-by-case basis.” I think that that is an encouraging sign.

EBRD: Are there any more questions? If there are none, thank you very much indeed.