Baltic banking crisis 'unlikely'

RIGA -- Homeownersand investors will welcome a new piece of research that says the Baltic is unlikelyto experience a banking crisis despite its economic imbalances and weakeningfundamentals.

In a reportentitled 'How Strong Are Emerging Europe's Banks?' researchers at London-basedCapital Economics say that "concerns are mounting about thequality oflendingin recent years. These are most acute in the Baltics, where rapid credit growthhas fuelled aconsumptionbinge and stoked asset prices. The result has been a propertybubble and a yawningcurrentaccount deficit.

"But despitethe apparently gloomy outlook, we think that a Baltic banking crisis isunlikely. The financial sector remains dominated byforeign-owned institutions and we believe that parent banks are simply toostrong to allow a subsidiary to fail," the report says.

Toillustrate its belief that the Baltic is not set for its own sub-prime mortgagescenario, the report shows that overall credit as a share of GDP is still only around90% in Estonia, which is the most developed market in the region. Incomparison, outstanding loans to households andnon-financial firms in the debt-laden United Kingdom totaled 150% of GDP lastyear.

CapitalEconomics points out that while lending growth across much of emerging EmergingEurope will slow over the coming year or so, credit as a share of GDP remainslow by Western standards and the region's banks are well set to expand over themedium term.

However,Capital does sign a few warning notes, particularly with regard to the realestate market, saying "The Baltic property bubble has burst in spectacularfashion. Data is patchy, but some estimates suggest that prices have fallen byas 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 nowhereclose to negative equity. But with mortgages typically accounting for up to 80%of total lending, there are legitimate concerns about the quality of Balticbanks' loan books."