TALLINN - The Bank of Estonia has signed a precautionary agreement with Riksbank, the Swedish Central Bank, which would allow the Baltic State to borrow nearly 1 billion euros.
The agreement is aimed at both guaranteeing financial stability and promoting confidence in financial markets in the Baltic State, a press release from the Bank of Estonia said. Estonia would be able to borrow as much as 10 billion Swedish kronor (0.87 billion euros) against Estonian kroons through the agreement.
The agreement would enhance stability by improving the ability of the Estonian Central Bank to provide liquidity under the currency board agreement.
"By signing this agreement the bank of Estonia has enhanced its capabilities to safeguard financial stability, in particular a liquidity provision, under the currency board arrangement," Andres Lipstok, the Governor of the Estonian Central Bank, said in a press release.
"The precautionary arrangement with Riksbank is an additional safeguard on top of high liquidity and capital buffers that Swedish banks' Estonian subsidiaries and branches already have. The agreement we signed with Riksbank today demonstrates also the importance of cross-border cooperation in a world of integrated financial markets," he said.
Bank of Estonia representatives said the two countries had begun working on the agreement about a year ago, but that the signing had been delayed by the onset of the world economic crisis. The bank highlighted that the agreement did not come about in response to the current financial crisis.
Representatives also said, however, that the size of the possible loan was based on estimations of how much liquidity Estonia may need.
"Since the banks active in Estonia mainly are part of Swedish banking groups, the agreement enables to provide additional liquidity support for the financial sector in collaboration with the central bank of Sweden. The size of the agreement, 10 billion Swedish kronor, is based on the estimated potential need for liquidity," Estonian Central Bank representatives told the Baltic News Service.
Livia Kulm, the central bank's PR chief, said the agreement was made in Swedish kronor because the other party was the central bank of Sweden. The parties are not disclosing more details, including for how long the agreement was concluded, at the moment.
Kulm also said that Estonia was not planning on entering into any other similar precautionary agreements with other central banks in the near future.
"We are not ruling out the signing of a similar agreement with some other central bank if necessary, but nothing of the kind is being planned now," she said.
Swedish banks that are heavily invested in the region are generally seeing the agreement as a positive move that will help with guaranteeing financial stability and promoting confidence in financial markets.
Ruta Eier, an analyst at SEB Pank, told BNS that cooperation between the central banks added confidence that the security net of the Estonian financial system was strong and well thought-out.
"Definitely this is a positive message for rating agencies and foreign analysts, and probably it will give more reason to talk about security of the Estonian financial sector," he said.