Interbank rates rise in Latvia and Lithuania

  • 1999-10-07
Interest rates rose sharply on the Latvian and Lithuanian interbank
markets this week while rates in Estonia remained unchanged. Experts
from the three Baltic states pointed to a surplus of funds on the
interbank financial markets. The reason for the rise is that most of
the market participants do not want to lend money in the local
markets at this time.

Interest rates rose the most in Lithuania, with daily rates reaching
16 percent per annum and semiannual interbank credits being offered
at an annual rate of 20 percent. At present, macroeconomic
development is having an adverse effect on the Lithuanian credit
resource market. According to several forecasts, the Lithuanian gross
domestic product may suffered a drop of 5 percent to 6 percent in the
second quarter of 1999, which could lead to lower GDP for the entire

Moreover, the Lithuanian current account gap is likely to widen to 15
percent of GDP in the second quarter, threatening the stability of
the litas. The rising interest rates in Lithuania are also a
reflection of the government's not quite successful placement of
eurobonds. The Financial Times reported that Lithuania had only
managed to sell eurobonds worth 100 million euros ($104. 17 million)
instead of the intended 250 million euros. In addition, Lithuanian
banks have until October 12 to bring their reserves up to the level
required by the central bank. Official figures on the Lithuanian GDP
and current account deficit for the second quarter will also be
published on the same date.

The cost of money on the Latvian market is the highest since last
November. As of October 1 the daily interbank rates in Latvia were
7.5 percent to 8.5 percent, twice as much compared with only a month
ago. There is no shortage of funds on the Latvian interbank market,
as the Latvian stock market is fully non-liquid at the moment.

Regardless of surplus funds, the interest rates keep climbing because
of uncertain macroeconomic prospects for the country. The numbers for
GDP and the current account deficit published last week were slightly
worse than expected by the government and the central bank. Due to
high interest rates on the Latvian interbank market, local banks have
almost completely stopped buying government securities, which are
offered at too high prices. Out of 3.2 million lats' ($5.52 million)
worth of T-bills offered at the last auction, only 350,000 lats'
worth were sold.

In Estonia the interbank market is still sluggish although activity
increased slightly this week from the flow of funds from the bourse
to the interbank market. Estonian money market experts do not expect
any considerable rise in rates in the near future, considering that
the macroeconomic indicators of the country currently are the best
among the three Baltic states.