By Aleks Tapinsh, DPA,
Riga : After years of easy credit that boosted spectacular economic growth in the Baltics, tougher times are ahead for lenders and borrowers in the three European Union nations.
“In the last four months, we saw the same number of loan default cases as in all of 2007,” the head of the Euler Hermes debt collection agency in the Baltics, Frank Wille, told DPA.
“It’s a good indicator confirming the trend of the deterioration of the economic situation,” Wille said. The company expects “a substantial increase” in default loans in the future from its business clients, he said.
Boosted by membership in the European Union in 2004, fuelled by domestic demand and abundance of credit from mostly Scandinavian banks, the interlinked Baltic economies posted the highest GDP growth in history over the past four years.
Those were the best of times. Now, Estonia and Latvia are gearing up for the worst of times as growth slows and a credit crunch ripples through the world economy.
Sweden’s central bank recently warned that “borrowers in the Baltic countries may experience problems paying their loans,” raising “a greater risk of loan losses” for exposed Swedish banks.
Driven by soaring household debt, outstanding commercial loans in Latvia skyrocketed to 95 percent of GDP in 2007 from 47 percent in 2003. Economists say the level is expected to reach 100 percent this year.
Governments and banks have imposed consumer creditworthiness standards – just as consumers hold off on buying as the region’s real estate prices plummet.
In Latvia, the government launched a new credit registry in January. Last year, banks began requiring a legal source of income before people could qualify for a loan, sending the number of issued loans down in an economy where a part of income still remains undeclared.
After several quarters of posting the highest GDP growth among the 27 EU countries, Latvia reported just 3.3-percent growth in the first three months of 2008.
Even more sobering is Latvia’s northern neighbour, Estonia. Its economy barely grew at all in the first quarter of 2008.
The Scandinavian banks – major lenders in three Baltic States – could be dangerously exposed in turbulent economies, but say they are in the region for the long haul.
One reassuring sign came when Swedbank, the largest lending bank in the Baltics, said in May it plans to introduce its brand in the three Baltic States.
“We are committed to the Baltic market and we believe in the long term potential of the market,” Swedbank chief executive Jan Liden told reporters at a Baltic business forum in Riga, Latvia.
The switch is designed to stop persistent rumours that the Stockholm-based bank is planning to quit the Baltics over post credit-crunch fears about its exposure.
SEB, another Scandinavian bank, is sending experts to Estonia to work with businesses to collect outstanding debt.
“The volume of delinquent loans has been increasing in line with the official statistics,” Anders Arozin, the head of Baltic operations at SEB, told DPA.
Meanwhile, loan volume growth in Estonia and Latvia has been flat in the last six months, he said.