TALLINN - Economists have warned that Estonia is heading for a credit crisis, with the level of personal and household debt reaching a new high. The latest statistics from the Bank of Estonia show that personal loans have increased by 61 percent in the past 12 months. Access to credit has become faster and easier, with more than eight companies springing up to offer on-the-spot loans of up to 5,000 kroons via SMS in recent months.
Individuals now owe banks 83.3 billion kroons (5.3 billion euros).
The majority of the debt is owed in the housing sector, where it grew by 62 percent in the past 12 months to reach 68.7 billion kroons.
Consumer credit also jumped rapidly, skyrocketing by 88 percent in the past year to 8.67 billion kroons.
Company loans increased by 60 percent to 86.7 billion kroons, while government loans remained at a similar level, reaching 2.85 billion kroons.
Professor Raul Eamets, head of the Tartu University Institute of Economics, said Estonians were now dramatically unprepared for an interest rate rise.
"The speed of this growth is scary," Professor Eamets said, "Our people have not experienced living with increasing interest rates. What I am afraid of is that there are a number of households, between about 10 and 15 percent, who will have problems paying back their loans if rates increase by even a small amount."
Professor Eamets said the rapid credit increase has been partly responsible for Estonia's high level of growth.
"Our whole economic base is based on lending activities. This is not sustainable. Our economic growth rate at 10 percent is nonsense, because this is based on very high lending rates and fast developments in real estate. It will not continue in the next 10 years.
"We will start to see an economic slowdown. Construction is not increasing at the same rate, and real estate prices are more or less stabilized. This engine is not working anymore, and growth will probably slowdown."
Professor Eamets said the government now had few mechanisms to curb personal lending levels.
Bank of Estonia Financial Stability Department spokeswoman Jana Kask said despite the high level of growth, Estonians were comparatively modest borrowers.
"There is actually a low level of indebtedness compared to the respective indicators of more developed EU countries," Kask said, pointing to the level of debt-to-GDP ratio, which remains below European norms. She said there were signs of a slight credit cooling.
However the central bank has now started to take steps to encourage banks to restrict access to credit, Kask said. Banks must now hold a reserve of 15 percent of the liabilities of their housing loans with the Bank of Estonia or in foreign securities. Previously this level was set at 13 percent. Although the increase does not affect consumers directly, Kask said it would serve as a signal to banks and the public that they should take more caution.
"Rapid growth in indebtedness certainly deteriorates the capability of households and companies to withstand long-term risks, and it feeds macroeconomic imbalances," Kask said.
"The Bank of Estonia is closely monitoring the developments… We are concerned about the situation."
