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The World Bank and Polands top lender PKO BP are in talks about a $500 million loan to support struggling Polish businesses, a World Bank official said in an interview on Monday. Fernando Montes-Negret, regional finance and private sector director at the bank, told Reuters the talks were still in a preliminary phase and a list of the industries the money would target had still to be agreed.
"We are talking with PKO BP about a loan of $500 million," Montes-Negret said. "The talks are still at an early stage. We still have to discuss what sectors the money should be addressed at." "PKO BP will be just a channel for the funds," he added.
Polands economy is expected to slow sharply this year, though it will perform better than most regional peers. Economists say tougher lending conditions and scarce cash sources pose the main problem for Polish businesses. Montes-Negret said he hoped the World Banks board of directors would make a final decision on the loan in September.
The World Bank, the International Monetary Fund and the European Bank for Reconstruction and Development said last month they would together commit 25 billion euros to aid East European banks and businesses. The World Bank is currently holding similar talks to those with PKO BP in Bulgaria and Croatia, Montes-Negret said.
The regions banking sector faces a challenging period, with deteriorating balance sheets, rising capital needs and a sharp rise in non-performing loans, Montes-Negret said. However, central and eastern Europe is very diverse, with banks in the Baltics and Ukraine in greatest difficulty, while Poland, the Czech Republic and Slovakia are in a much more secure position, he said.
"We can expect a sharp rise in non-performing loans in the Baltics and Ukraine, partly due to a weakening of local currencies, as well as drastic drops in industrial production," Montes-Negret said. As the economies of the most troubled East European countries contract and unemployment spikes, people will have more trouble repaying their loans.
Banks in most of these countries also suffer from large imbalances between their loans and the deposits they have accumulated. Loans are more than double deposits in Latvia, making them even more vulnerable to deteriorating conditions. Banks with larger Western-based parents may be better off as they will most likely receive support to keep balance sheets at acceptable levels, Montes-Negret said.
"We have talked to many Western banks (with operations in Eastern Europe) and they say they want to stay in the region, to weather the storm," Montes-Negret said. "Staying will cost them money, but they had good returns for years before the crisis, and the region is still under-banked and that is favourable in the long term."

Copyright Reuters, 2009

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