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Easy markets access can delay reforms in emerging Europe: EBRD

By Carolyn Cohn

LONDON (Reuters) - Some emerging European countries are able to delay much-needed reforms because they can borrow money in international markets without strings attached, the president of the European Bank for Reconstruction and Development said on Thursday.

With money-printing in the developed world driving investors to seek higher-yielding assets, countries such as Hungary and Ukraine have issued dollar debt this year, avoiding the need to implement unpopular measures to win international funding.

"They are all able to get money in the markets, which is why they think they do not need a (lending) program," Suma Chakrabarti said in interviews with Reuters and Reuters Insider television.

"The worry is whether this would delay reforms required to attract investment."

Ukraine, for example, might delay anti-corruption measures required from the EBRD, as long as it had market access, he said.

The EBRD was set up in 1991 to help the countries of the former Soviet Union develop market economies but has gradually extended its reach, most recently to North Africa. It invests mainly in the private sector and lent around 9 billion euros ($11.7 billion) last year.

The Bank forecasts GDP growth of 3.1 percent for emerging Europe and North Africa this year, with its latest forecast due at its annual meeting in Istanbul next month.

Chakrabarti said that ongoing concern about key trading partner western Europe - hit by a bail-out this year for Cyprus and continued issues with its banks - meant a hoped-for pick-up in growth in emerging Europe next year may be slower to arrive.

"Western Europe remains the anchor," he said.

"The question is whether 2014 will be a new start. We thought western Europe would be in a better shape by then - (the recovery) might be slightly more delayed."

Some euro zone officials, backed by the International Monetary Fund, are saying it is time to throttle back on debt-cutting drives in order to let economies grow, but Germany and the European Central Bank are urging governments to persist with budget consolidation and reforms.

Growth could not come without reform, Chakrabarti said.

"The problem is that there is no way the growth is going to come first," he said.

"You are in a global competition for investment."

Chakrabarti said it was important for export-driven economies in emerging Europe to increase their levels of external investment in sectors such as infrastructure, and they needed to be more adventurous about doing so.

He said Turkey was receiving attention from investors outside Europe because of its strong private sector, while Serbia, which has won a preliminary green light for EU accession talks this year, had increasingly looked away from western Europe to China, India and also Turkey for investment.

Chakrabarti also said Macedonia had been successful in attracting foreign investment due to its relative lack of red tape.

The Bank is spearheading Vienna 2.0, a follow-up to the Vienna Initiative set up to support emerging European banks after the 2008/09 financial crisis.

Deleveraging by western European banks from the region had slowed and banks were awash with liquidity, but Chakrabarti said they remained reluctant to lend.

The EBRD announced a two-year 30 billion euro joint action plan with the European Investment Bank and World Bank late last year, to help the countries of central and southeastern Europe.

Slovenia has delayed announcing a plan to sell its sizeable holdings in state-owned firms, a central part of reforms needed to help the euro zone country stave off a bailout.

"I am worried about Slovenia and other countries in our region because they need to change their policies," Chakrabarti said.

RUSSIA, UKRAINE

In the region's biggest country of operation, BRIC member Russia, it was important to diversify the economy and stamp out corruption, Chakrabarti said.

"Russia was more diversified in terms of economic sectors and locations under Soviet rule than under capitalism, they need to diversify quickly," he said.

The EBRD has also stepped up its cooperation with the Ukrainian authorities to improve the investment climate, and especially to eradicate corruption.

Chakrabarti said the Bank, which has a mandate to promote democracy in its countries of operation, invested around 950 million euros in Ukraine last year but the country needed to act on corruption for the EBRD to continue lending.

"Foreign investors do not want to go there - we need to work on this initiative together."

Chakrabarti said progress in investing in Egypt, one of the Bank's newest countries of operation, had been held up by political instability, but he was optimistic the country could reach a loan deal with the IMF.

The IMF and Egyptian officials said on Sunday they were working to reach a deal on a proposed $4.8 billion loan in "coming weeks" following progress during weekend discussions in Washington. ($1 = 0.7689 euros)

(Additional reporting by Philip Baillie; editing by Ron Askew)

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