VILNIUS - Lithuania's central bank Governor Reinoldijus Sarkinas believes that the current recession, the deepest in the European Union, is "close to bottoming out and the economy may start growing next year if trade demand continues to gain strength, reports Bloomberg. He expects that "Under positive external conditions, a recovery, even if at very low growth rates, may begin next year."
The economy is expected to contract further, by 4.3 percent, in 2010 as the country adapts to strict austerity measures needed to meet euro adoption conditions. Lithuania, like neighboring Latvia and Estonia, pegs its currency to the euro inside the exchange rate mechanism. Sarkinas has called on the government to cut spending to a level "it can afford."
Government spending cuts and tax increases contributed to a 20.2 percent economic contraction last quarter. The Cabinet has proposed savings, including cuts on social spending, to stop the deficit next year from widening beyond the 8 percent of GDP estimated for this year. "The deficit needs to start narrowing next year," says Sarkinas. "We shouldn't borrow just for consumption. One must live within one's means."
He added that "A swelling budget gap doesn't mean the country will need outside help with its finances." Lithuania has "no need at the moment" to ask for money from foreign lenders, though "there's nothing worrying if such a need occurs," he said.
Latvia, which is suffering the second-deepest recession in the EU after Lithuania, is relying on a 7.5 billion euro loan from international lenders to keep it afloat. Latvia's economic difficulties "can't be comforting to anyone, neither to us, nor to Latvians, nor to other countries," Sarkinas said. "We'd benefit if the situation there would be solved as soon as possible and would begin improving."
Lithuania's government can avoid a foreign-led bailout if it raises funds on the domestic bond market or abroad. "The Baltic region is three separate countries with different situations, and one shouldn't put an 'equals' mark [on it]," stresses Sarkinas. Borrowing opportunities in foreign markets "have significantly improved since the start of the year," he said, and the government is likely to borrow at a cheaper rate than it did earlier this year, when it sold euro-denominated bonds.
The economic crisis in the Baltics is having effects outside the region, with western European lenders suffering increasing loan losses as a growing number of Baltic borrowers are unable to service their debt.
The recession in the Baltics poses the "most serious risk" to Sweden's economy and budget, says Swedish Finance Minister Anders Borg. Sweden's Swedbank and SEB are the biggest lenders in the region.
Sarkinas said Swedish lenders are operating "completely fine" in Lithuania, adding that an improvement in the banking industry's loan quality may take longer to achieve. "It's a difficult time for banks," he said. Loan provisions for bad debt now average 3.28 percent of total lending, compared with 0.8 percent a year ago, and "will continue increasing." Even so, lenders are "well-prepared" and "have accumulated sufficient capital to absorb future losses," Sarkinas said.
Capital adequacy ratios average more than 13 percent, compared with the 8 percent ratio required by the central bank, he adds.
Bank lending portfolios, which shrank about 7 percent from the start of the year, "are showing the first signs of stabilizing and may start growing in coming months," Sarkinas said. Loans to households and businesses were almost unchanged in August after shrinking in each of the first seven months this year.