Baltic states housing bubble
[7] The increase of credit supply to private sectors was largely to be blamed for the housing bubble in the Baltic states, due to the availability of financing from foreign lenders (predominantly Scandinavian banks).
[8] The condition was further worsened due to the absence of loan-to-value ratio as well as negative real interest rate which spurred speculators to drive the market housing demand higher.
[7] Subsequently, real estate market were dragged down, further deteriorate credit quality, forced banks to further tighten lending standards.
[10] Estonia, on the other hand, saw the public sector wages and benefits slashed in order to improve the budget balance in preparation for the adoption of euro.
[11] The economy in the Baltic states had been among the fastest growing in the European Area following the collapse of the Soviet Union as well as the recession due to 1998 Russian financial crisis.
A combination of growth above potential, high inflation and far widening of the current account deficit were singled out as causes behind the overheating economy in the Baltic states.
Referendum carried out in 2003 showed that majority Lithuanian, Estonian and Latvian supported the move to integrate closer to the EU bloc.
Following a sharp inflow of cheap foreign credit, banks has been more willing to lend to corporate and household for real estate related activities.
By 2004, inflation rate in Latvia was exceptionally higher than Estonia and Lithuania due to strong domestic demand – which triggered the symptom of overheated economy.
High availability of credit combined with low interest rate partly attracted substantial volume of property speculation within the Baltic States.
As cheap foreign credit (in the form of FDI) flooded the financial sector in Estonia, 87.0% of mortgage loans for household were denominated in Euro.
In Latvia, average interest rate for mortgage loan has gone up sharply as the Latvian authorities move in to cool off the overheating property market.
Total mortgage loans down by 4.0% in 2007 as banks in Latvia (notably Swedbank and SEB banka) tighten the lending requirements to household.
It took up to almost 4 years before the house price-to-GDP per capita ratio to return to the reference point levels in Estonia and Latvia, to lesser extent in Lithuania.
[8] The second indicator also show that the house price-to-rent ratio dynamics imbalance began in 2004, before broadly adjusted back to pre-housing prices bubble levels in 2011.
[11] Due to ample global liquidity, the parent banks from the Nordic region were able to offer very low interest rates to the Baltic populations.
Throughout the housing bubble period in the Baltic states, the deposit to loans ratio continued to widened – far higher than the entire Euro Area.
[11] For that reason, banks in the Baltic states have to borrow abroad heavily denominated in Euros before passing the currency risk to potential customers.
[8] Borrowers in Estonia and Latvia were also practically free from the maturity limit on their mortgage loans due to the absence of such condition by the lenders.
The 2009 budget has incorporated several tough measurements to control the deficit in order to fulfil the GDP Maastricht ceiling as condition to adoption of Euro.
Operational expenditure was brought down following an average cut of 8% across ministries as well as wage bill frozen at the 2008 level following the trimming of civil servants.
[22] Under the new framework, government guarantees of a total of 3 billion Litas or equivalent to 3.4% of Lithuania GDP were issued for bank recapitalization and asset purchases.
[23] Based on the European Commission assessments of all three National Reform Programmes, the issue on poverty and social inclusion in the Baltic states have been worsen.
[24] This stemmed from massive public sector cuts and a major tax hike after the bailout of the Parex Bank earlier in December.
The outcome of the riot was a period of political instability in Latvia that lasted for more than a year leading up to the Latvian parliamentary election carried out later in 2010.
[25] By February 2009, 20, PM Ivars Godmanis (the Latvia's First Party/Latvian Way) resigned from his posts after losing the support from the People's Party and the Union of Greens and Farmers.
Even before taking office in December, PM Andrius Kubilius had announced budget spending cuts and wage freezes designed to shore up public finances as the slowdown reduces revenue.
[26] Similar to the riot in Latvia, protesters led by Lithuanian Trade Union Confederation were unhappy with the government decision to reform the tax system in Lithuania as well as public wage cuts.
Nevertheless, the austerity measurements by PM Andrius Kubilius has resulted his loss in the following 2012 Lithuanian parliamentary election as the Social Democrat led by Algirdas Butkevicius captured the most seats in the parliament.
[27] Meanwhile, support for the government of Prime Minister Andrus Ansip fell to 4.3 on a 1-to-10 scale on 29 December 2008 which was the lowest since March 2005, according to the survey by EMOR polling company, commissioned by the public broadcaster.
