East Europe needs to step up reforms: EBRD chief

FRANKFURT Fri Nov 23, 2012 11:57pm IST

FRANKFURT (Reuters) - Eastern European countries must make themselves more attractive to foreign investors by cutting red tape and enforcing rules consistently, the European Bank for Reconstruction and Development's president said on Friday.

Suma Chakrabarti told Reuters in an interview that with the worst problems in bank liquidity abating, there would be a shift by the bank toward helping the real economy instead of crisis maintenance in the financial sector.

The EBRD was set up in 1991 to manage the transition of Europe's former communist countries to market economies.

The Balkan states are highly reliant on investment from Greece and Italy as well as other euro zone nations, he said. These investors look for stable legal systems, consistent rule-enforcement and regional integration.

Politicians are working toward this at different speeds, he said, highlighting Slovenia as a success story.

"All countries have realized they need to shift along this curve, the question is how far along they are," Chakrabarti said.

"Slovenia is a good example of a country further advanced in having this debate. Some other countries like Hungary need to do that in a more thorough way. But I think that is starting to happen in Hungary."

Despite the EBRD's praise, Slovenia is still fighting to avoid having to seek in international bailout to help its banks, which are struggling with bad loans.

Chakrabarti said that a new 30-billion-euro plan with the European Investment Bank and the World Bank - the EBRD is set to invest 4 billion through it - would show much stronger results when governments do their bit.

"We want to attract FDI (foreign direct investment) back. The 4 billion is very important, but it's only going to attract value if the politicians in these countries are doing what they are doing in Slovenia, have that debate of how we change the political system," he said.

A positive sign in Eastern Europe has been that banks are currently shrinking their operations at a slower pace than earlier during the financial crisis, and said banks shouldn't be blamed for all the region's problems.

"The banks have behaved very responsibly, they have behaved very well, we don't see the pace of deleveraging that we saw a year ago. That's not so much the problem, they've got enough capital now," Chakrabarti said, but added that sometimes longer term loans were still difficult to find.

The EBRD already spearheads the Vienna 2.0 initiative set up to prevent a disorderly exit from the region by cash-strapped western European banks.

Chakrabarti said that the EBRD expects to start operations in Kosovo next year, with infrastructure and energy efficiency projects as priorities.

He said it was too early to say how much would be invested there, but said "it will be important to make a sizable investment in that country."

Formerly a senior British civil servant, Chakrabarti took the helm of the EBRD four months ago in the middle of the crisis.

"I'm loving it," he said. "I'm enjoying myself enormously."

(Reporting by Sakari Suoninen; Editing by Toby Chopra)

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