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Challenges loom for Lemierre successor at EBRD

As European Bank for Reconstruction and Development President Jean Lemierre prepares to hand over the reins of the world’s youngest multilateral institution after eight years, his successor will be charged with its most challenging phase -- ensuring its relevance and survival.

That man will likely be Germany’s deputy finance minister Thomas Mirow, who having garnered overwhelming support from the European Union at this week’s Ecofin meeting, will be presented as the EU candidate at the bank’s annual meeting in Kiev in May. Three other candidates had staked a claim to lead the 16-year old European Bank for Reconstruction and Development -- former Greek finance minister Yannos Papantoniou who steered his country into the euro zone, Czech central banker Zdenek Tuma and former Hungarian central banker György Surányi.

But not only is Germany a big financial backer of the bank, with almost 10% of its capital, it has no citizens running global organizations. And what gives Mirow the edge was also possibly Berlin’s excellent relations with Russia – the EBRD’s largest country of operations. But with calls from some shareholders for the EBRD to be gradually wound down -- now that the bulk of its original mission to help transform former communist states into market economies is complete -- the new leader faces critical tasks.

The EBRD last year announced a radical strategy change – a push into poorer and riskier southern and eastern Europe and an exit from the more mature central European economies. Now the United States -- the bank’s biggest shareholder -- wants it to expand membership to Turkey, a move which would require a change in the bank’s mandate to help former communist countries and which Lemmierre has resisted. Many others question the bank’s development lending programs in Russia, which is enjoying the fruits of a decade-long oil price boom. “Lemierre has set a very high bar as EBRD president....he has elevated it to a proper multilateral organisation status and whoever succeeds him faces the challenge of continuing to do that,” says Zsolt Papp, chief eastern Europe economist at KBC Financial Products and a veteran eastern Europe watcher.

Lemierre, a 57 year-old Frenchman, has steered the EBRD for half its existence and is seen as having helped foster booming growth in ex-Soviet bloc economies. Under him, the bank invested €25.5 billion into projects worth €77.6 billion, turned record profits and has shifted its focus to small business and energy efficiency projects. Many believe he has brought new credibility to the EBRD, tainted in its early years by allegations of extravagance and mismanagement. Now as the bank expands in central Asia and the Balkans, it will be stress-testing local corporate governance and judiciary and taking on more political risk, Papp says. “It could be a tricky job for someone like Mirow who will be regarded as a political lightweight. At a time when the EBRD will have to justify the reason for its existence it could also be an issue that he has hardly any experience in banking.”

Credit crunch, risks

The changes at the top come at an especially challenging period for the bank, which unlike multilateral bodies like the World Bank, is meant to be a for-profit organization. Having bounced back spectacularly from the $200 million loss caused by the 1998 Russian crisis to post a record $2.4 billion profit in 2006, it faces the double challenge of a global credit crisis and boosting operations in poorer southern and eastern Europe. The bank issues its 2007 results on Thursday. With the credit crunch nowhere near its end, it may take more time than anticipated for international banks and private lenders to fully ramp up in the poorer countries, meaning riskier projects may remain the EBRD’s lot for much longer. “It’s going to be tougher to make a buck going forward,” says Larry Hays, senior director in Standard & Poor’s sovereign ratings group with a focus on multilateral organizations. There are signs of shifting among the bank’s 63 shareholders too, which could prove one of Mirow’s first challenges in office.

Australia is expected to withdraw its 1% stake to focus on areas closer to home such as East Timor, while some at the European Investment Bank, which currently owns 3% of the EBRD, are talking of increasing that to a majority stake. “The aim of the EIB is to build a majority, step by step,” Matthias Kollatz-Ahnen, Germany’s representative on the EIB’s management board told reporters this week. “We don’t want more institutions, we want to slim it down.” Hays said the opportunity to realize big gains from lending and equity investments in the EBRD’s countries of operation is probably diminishing as EBRD does less business in more advanced countries and faces tougher competition from commercial institutions. “They are moving into frontier countries which are more challenging. So as the game changes and becomes more challenging there is a greater argument for a candidate with hands-on banking experience,” he added, declining comment on individual candidates.

Mirow himself would disagree, saying this week, that his experience of development projects would serve him better at the EBRD than tenure at a bank, while East Germany’s transition to a market economy held lessons for its neighbors further east. The debate also highlighted one that was already played out at the World Bank -- should emerging economies play a bigger role in running global financial institutions. This time again, G7 states seem to have hung on to the top job in an influential organization, key to the transition of eastern Europe. “Like many multi-lateral organizations, there’s a disconnect between the leadership and where the EBRD operates,” says Papp. “If Mirow can’t fill Lemierre’s shoes, a lot of eastern European countries will lose patience with the bank.” (Reuters)