Baltic banking crisis 'unlikely'

RIGA -- Homeowners and investors will welcome a new piece of research that says the Baltic is unlikely to experience a banking crisis despite its economic imbalances and weakening fundamentals.

In a report entitled 'How Strong Are Emerging Europe's Banks?' researchers at London-based Capital Economics say that "concerns are mounting about the quality oflending in recent years. These are most acute in the Baltics, where rapid credit growth has fuelled aconsumption binge and stoked asset prices. The result has been a property bubble and a yawningcurrent account deficit.

"But despite the apparently gloomy outlook, we think that a Baltic banking crisis is unlikely. The financial sector remains dominated by foreign-owned institutions and we believe that parent banks are simply too strong to allow a subsidiary to fail," the report says.

To illustrate its belief that the Baltic is not set for its own sub-prime mortgage scenario, the report shows that overall credit as a share of GDP is still only around 90% in Estonia, which is the most developed market in the region. In comparison, outstanding loans to households and non-financial firms in the debt-laden United Kingdom totaled 150% of GDP last year.

Capital Economics points out that while lending growth across much of emerging Emerging Europe will slow over the coming year or so, credit as a share of GDP remains low by Western standards and the region's banks are well set to expand over the medium term.

However, Capital does sign a few warning notes, particularly with regard to the real estate market, saying "The Baltic property bubble has burst in spectacular fashion. Data is patchy, but some estimates suggest that prices have fallen by as much as 20% in Riga and 10% in Tallinn from their peaks earlier last year. Admittedly, the massive run-up in prices means that most borrowers are nowhere close to negative equity. But with mortgages typically accounting for up to 80% of total lending, there are legitimate concerns about the quality of Baltic banks' loan books."