Since autumn 2008 EBRD’s region of operations (the 30 countries from the Czech Republic to Mongolia (West-East), from Turkey to Russia (South-North) have been affected by an abrupt and unexpected crisis, a result of sudden risk aversion by Western banks, drop in demand by their importing countries and a resulting down-writing by international rating agencies and media. The former growth engine for Europe has turned into a recession-struck region, cut off from formerly abundant growth financing from abroad. While the situation differs significantly from country to country, mainly depending on their foreign currency reserve position, exchange rate regime and current account balance, the “region” is perceived by many as a homogeneous entity – and treated accordingly. Collateral victims of this perception are the large Western banks active in this region to a significant extent: in most of the relevant EU and Balkan countries 70%-90% of the banking assets “belong” to Western banks. Many of the countries concerned have so far not been willing or able to put together significant stimulus packages and help for the banks, lacking the necessary fiscal space and/or reserves. Falls in exchange rates have pushed up many countries’ real foreign debt. While in many countries government debt is low and mainly domestic, the private sector, both households and enterprises, are heavily indebted in foreign currency. The True Foreign Debt Obligations EBRD estimates that its countries of operations’ banks have total gross external foreign currency debt in the amount of more than 600 bn USD; debt obligations due in 2009 amounting to around 220 bn USD. This is significantly less than international media have reported, which wrongly included nationally held and financed debt into their figures, mis-interpreting BIS data. Out of the 220 bn USD for this year, a bit less than ½ is owed by the Central European and Baltic countries, 1/10 by South Eastern Europe, and the rest by CIS countries and Turkey. In order to break the policy stalemate hindering effective action to combat the crisis, the Vienna Initiative brought together policymakers from the home and host countries of the international banks and the International Financial Institutions (IFI), together with the banks involved. There effective discussions about shared responsibility and individual policy action were held, most recently on a country-by-country basis with Romania and Serbia. Joint IFI Action IFI decided in February to assume joint responsibility for the “region”, acting in a counter-cyclical way, and promised a package of 24.5 bn € for the banks and the real economy of the region. In an unprecedented way, IFI have committed to act jointly to combat the crisis. Of this, approximately 6 bn € will come from EBRD which has decided to increase its total intervention volume in 2009 by around 30% relative to 2008. Help from the European Union Eurozone member states have access to ECB help and have verbal commitments from the “old” EU countries that they will receive help if needed. Non-Euro EU members have theoretically access to ECB swap lines (formerly extended to Denmark), even though this discussion has not yet been concluded. One idea might be ECB “permission” for individual Eurozone countries to extend such swap lines to EU member states. In addition, the Spring EU Summit at the end of March doubled its balance-of-payment support umbrella to 50 bn € (up to now Hungary, Romania and Latvia have received such aid). With respect to the real economy the EC has decided to front-load its Structural programs and added a total amount of 3 bn € to its 2009 envelope (Poland, Hungary and the Czech Republic stand to gain most from this, if they manage to design appropriate programs). For non-EU countries in the state of candidacy, pre-candidacy or “neighbourhood” countries, up to 125 m € in additional pre-accession funds are available, as well as a 150 m € “crisis response package”. IMF to the Rescue In view of the above-mentioned external financing obligations of the banks of the “region” these sums may seem small. However, they need to be supplemented, where necessary and appropriate by balance-of-payments support from the International Monetary Fund. EU states have most recently agreed to add 75 bn € to IMF volume, supplemented already committed Japanese funds of 100 bn USD. The target is to increase IMF’s potential intervention volume to 500 bn USD. Other countries have made similar promises, no figures however are available at this time. The G-20 meeting might produce some results in this area. A number of countries in the “region” has already applied for IMF money, a number of other countries is in negotiations or considering such negotiations. There are indications that the IMF in this crisis-response-mode will also change its “conditionality” to a stance which takes better account than before of the need to combat poverty and social deprivation in these countries – a lesson learned from the backlash this institution received in the aftermath of the Asian crisis at the end of the last millennium. Of course, also the international banks themselves will add liquidity (and sometimes equity) to their affiliates and subsidiaries, as a recent letter by 9 banks to the IMF proves. While some of the Western bank support packages contain various restrictions against this money to be used abroad, there have been recent political commitments at the February 2009 Informal ECOFIN not to discriminate by nationality. Still, close monitoring will be necessary to ensure that necessary cross-border flows will not be impeded. Regional/Global Responsibility – National Homework The international community has woken up to the fact that this crisis is global and that global and regional solutions must be found and responsibilities must be shared. EBRD’s “region” is too important for the global economy, and especially for Europe, to be left to its own insufficient devices. Global and regional solidarity are in the self-interest of us all. While most of the countries of this “region” have pursued the right economic policies (there are notable exceptions), crisis response in some of the lags also because of political fragility. In a number of countries directed crisis response is lacking because governments are weak, have lost popular support or are fragmented and fighting within themselves. Several governments have fallen. Outside help, however, can only be effective, if internal response activities are able to lay the foundations for directed policy action. Without such a joint will to tackle the crisis, no amount of money and help will suffice. There is homework to be done.