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Cablegate: Estonian Banks and Markets: Whistling Past The

VZCZCXRO3007
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHTL #0355/01 2840841
ZNR UUUUU ZZH
R 100841Z OCT 08
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 0855
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 TALLINN 000355

DEPARTMENT FOR EEB/CBA AND EUR/NB

SIPDIS

E.O. 12958: N/A
TAGS: PGOV EFIN ECON EINV EN
SUBJECT: Estonian Banks and Markets: Whistling Past the
Graveyard ... for now

1. (U) SUMMARY: The Government of Estonia (GOE) is
moving quickly to reassure the public and raise deposit
guarantees as the global financial crisis continues to
dominate the news. On October 9, the GOE approved a
new EUR 50,000 limit on deposits. Local bankers and
stock market officials remain cautiously, if nervously
optimistic that Estonia's Swedish- and Finnish-owned
banks are stable, relatively safe from recent European
and U.S. collapses, and that the public, for now, will
not panic. END SUMMARY.

Estonian Economy Afloat, but Feeling the Global Crunch

2. (U) Estonia is already feeling some ripple effects
from the spreading global credit crisis. Typically
insulated in the Nordic/Baltic tributary of global
capital flows, the country has been exposed to growing
investor fears throughout Scandinavia and Europe. The 8
percent average GDP growth rate Estonia enjoyed since
2000 was driven largely by the real estate sector, a
bubble that has now burst. The outlook for 2008 is for
inflation of 10 percent and GDP growth just over 1
percent. In early October, Fitch Ratings downgraded
Estonian default ratings from A to
A-, and has long expressed concern over the three Baltic
countries' current account deficits, rapid credit growth
and rising debt ratios.

3. (U) The Lehman Brothers collapse did impact the
Estonian market, shattering the illusion that Estonia is
shielded from the U.S. markets by Scandinavia. Lehman's
London branch had pumped EUR 79 million into Tallinn's
real estate market in early 2008, and its bankruptcy has
left a major shopping center development in mortgage
limbo. Estonia's Unemployment Insurance Fund (UIF) is
managed by Fortis Investments Management, but since the
Belgian company's takeover, a financial advisor to the
UIF has said Estonia's state assets are not in danger.
They are deposited with the Swedish-owned SEB bank in
Estonia, and simply managed by Fortis, but do not appear
on the troubled company's balance sheet.

Government Moving Quickly to Reassure Public

4. (U) On September 30, Bank of Estonia Vice President
Andres Sutt told us that Estonian banks are coping with
the global financial turmoil. Capital and liquidity
are strong, and recently tightened requirements now
ensure greater safety and reliability in the banking
system. On October 7, Minister of Finance Ivari Padar
announced that Estonia will adopt the new EU
regulations raising deposit guarantees to EUR 50,000,
and by October 9, the Government of Estonia (GOE) had
approved the measure, including 100 percent (up from the
previous 90 percent) of deposits under EUR 50,000. The
institution responsible for this is the Guarantee Fund
(www.tf.ee) which has assets equal to three percent of
all deposits at financial institutions in Estonia.
(NOTE: Estonian banks hold roughly USD 4.6 billion in
excess of the old guaranteed minimum of EUR 20,000. END
NOTE.) On October 8, a Ministry of Finance spokesperson
told us they do not see any troubling signs of stress in
the Estonian banking sector at the moment. Estonia's
Financial Supervisory Authority (FSA) has checked on the
solvency of local banks and feels they are stable and
not at risk from 'toxic mortgages' or the like.

What the Bankers and Brokers Say:

5. (U) Central bankers and executives at the large
private banks stress the basic stability of the system
here, noting that even if parent companies in Sweden
took a big hit, daughter banks in Estonia which are
subsidiaries, not branches, would be somewhat insulated.
The Estonian banking market is dominated by two Swedish
banks, Swedbank (formerly Hansapank) and SEB who have
jointly more than 76 percent of the market share.
Following the Lehman Brothers collapse, Erkki Raasuke,
CEO of Swedbank Baltic, and Vahur Kraft, CEO of Nordea
Bank Estonia both stated that they felt the subsidiaries
of Nordic banks in Estonia are safe.

6. (U) Erki Kert, head of analysis department of the
Tallinn-based investment bank LHV, predicts that the
U.S. crisis will certainly slow the recovery of the
Baltic economies. (NOTE: In 2007, LHV employed 40
people across Estonia, Latvia and Lithuania, with net
corporate profit of USD 1.7 million. END NOTE.)
American Chamber of Commerce President Yrjo Ojassar
estimates it will be several months before the full

TALLINN 00000355 002 OF 002


impact of the U.S. crisis is felt in Estonia. However,
he also told us he believes that ultimately the crisis
could be a good thing for the economy, spurring greater
innovation in companies that have heretofore been
content to idly rake in profits in good times.

7. (U) The Tallinn stock market, the OMXT (which merged
with NASDAQ in April 2008) has 18 listed companies.
Since September 1, the index has fallen 31 percent.
Market OMXT Managing Director Kalle Viks told EconOff
this plunge is due to general investor fears stemming
from the current global situation, rather than any
specific local concerns about the Estonian economy. He
does not expect any panic, or bank runs, and said that
local banks are 'slightly worried', but customers are
servicing their loans. Through the end of August, only
2 percent of outstanding commercial loans were overdue
more than 60 days. However, the reporting service
CreditInfo announced in mid-September that the year-on-
year number of companies defaulting on payments rose 42
percent, to 3,163 for the first half of 2008.

PHILLIPS

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