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