VZCZCXRO2403
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHTL #0366/01 2971211
ZNR UUUUU ZZH
R 231211Z OCT 08
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 0873
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 03 TALLINN 000366 
 
DEPARTMENT FOR EEB/CBA, EUR/ERA AND EUR/NB 
 
SIPDIS 
SENSITIVE 
 
C O R R E C T E D COPY - CORRECTED SUBJECT LINE 
 
E.O. 12958: N/A 
TAGS: PGOV EFIN ECON EINV EN
 
SUBJECT:Estonia Not Likely to be the Next Iceland 
 
REF: A) TALLINN 355 
     B) KESSLER 22 OCTOBER E-MAIL TO POSTS 
     C) STOCKHOLM 707 
 
TALLINN 00000366  001.2 OF 003 
 
 
 
¶1.  (SBU) SUMMARY AND COMMENT:  The Estonian banking 
system appears stable and consumer and investor 
confidence are relatively unruffled by the past month 
of global financial turmoil.  Banking comprises only 5 
percent of GDP in Estonia - one-fifth the size of 
Iceland's banking sector.  Businesses are reacting to 
market signals by re-branding and re-sizing their 
workforces.  There are signs that employee loyalty and 
productivity are increasing in response to the 
economic downturn that began in Estonia well before 
this summer's global crisis.  Approval ratings for the 
Prime Minister's Reform Party have declined slightly 
in polls, but post does not anticipate any serious 
negative impact on domestic political stability. 
While Estonian officials are closely observing 
implementation of the USD 700 billion rescue package, 
and wondering aloud how soon the USG will again reduce 
intervention in the free market, we do not believe 
these questions reflect any significant shift in 
Estonian attitudes toward the United States.  END 
SUMMARY AND COMMENT. 
 
¶2.  (U) Recent speculation about Estonian banks 
possibly suffering a collapse similar to that in 
Iceland came to a head with an October 14 article in 
the British paper, the Independent. The article raised 
the specter that "More countries are at risk of 
following Iceland into bankruptcy, with the Baltic 
republics of Estonia, Latvia and Lithuania now looking 
particularly vulnerable..."  The Government of Estonia 
(GOE) moved quickly to counter such suggestions. 
Andres Lipstok, Governor of the Bank of Estonia, and 
Ivari Padar, Minister of Finance immediately issued a 
statement about their meeting in Washington with IMF 
Director Dominique Strauss-Kahn.  They said there was 
no discussion of similarities between Iceland and 
Estonia with the IMF Director.  Later that day, the 
author of the Independent article issued a statement 
retracting his reference to IMF concerns about the 
Baltics, and acknowledging that this was his own 
addition.  Nevertheless, the shakiness of the global 
banking system in recent weeks, and the urgent 
measures being taking to shore up national economies 
across the EU (Ref A) beg the question: could Estonia 
follow Iceland into the abyss? 
 
BANKING: The Economy's Cardiovascular system 
 
¶3. (U) The Estonian banking system is highly 
integrated with that of Sweden and Finland, and so far 
there are no reported signs of instability in either 
system (Ref C). A key difference between Iceland's 
situation and Estonia's is the banking sector as a 
share of GDP.  In his statement, Governor Lipstok 
pointed out that the Icelandic banking sector totals 
more than 25 percent of GDP, while in Estonia it is 
only 5 percent.  Furthermore, noted Lipstok, Iceland 
lacked the foreign ownership of financial institutions 
that prevails in Estonia.  Ironically, this may 
provide Estonia a degree of insulation that Iceland 
did not have.  The October 15 joint statement from the 
Bank of Estonia and Ministry of Finance states that 
"...the pillars of our economy have remained strong 
also in the period of economic adjustment, the 
financial standing of the banks operating in Estonia 
continues to be sound and their capitalization and 
buffers for coping with possible loan losses are 
good." 
 
REAL ESTATE: Watching Closely as the Bubble Deflates 
 
¶4. (U) Tighter credit and stratospheric property 
prices were already piercing Estonia's housing bubble 
before the global crisis of August-September. 
Interest rates in Estonia rose slightly with EURIBOR 
in late September, but are now falling, in reaction to 
the European Central Bank's concerted effort to inject 
liquidity into the financial markets.  One of the 
leading Estonian real estate agencies, Ober Haus, 
reported that although students returning to 
universities have brought a temporary revival to the 
September rental market, prices for apartments 
continued to drop.  September 2008 prices in Tallinn 
were down an average of 19 percent from 2007 prices, 
 
TALLINN 00000366  002.2 OF 003 
 
 
and in central Tallinn the decline was 25 percent. 
Prices in the city center have been more or less 
stable for the past three months, but real estate 
experts predict they will continue to fall until 
summer 2009. 
 
¶5. (U) A considerable decline in new construction has 
also influenced related businesses.  Many building 
materials stores have announced markedly decreased 
sales.  One of the largest, K-Raua ACE, announced 
recently that their sales have dropped 50 percent 
since last year, forcing them to change their concept 
from building materials to renovation and finishing 
supplies. 
However, overall retail consumer activity is still 
robust.  One of the largest shopping malls in central 
Tallinn, "Kaubamaja" broke their all-time sales and 
visitor records during their annual discount campaign 
the week of October 6.  The following week, the 
Finnish retail giant Stockmann had a similar crush of 
customers in its Tallinn store during their autumn 
sale. 
 
EMPLOYMENT AND CONSUMER CREDIT: Holding Steady 
 
¶6. (U) Estonia's unemployment rate dropped from 5.9 
percent in 2006 to 4.7 percent in 2007.  The first two 
quarters of 2008 suggest a continuing trend, with the 
jobless rate hovering just over 4 percent.  However, 
there are signs this might reverse in the near future, 
as public and private sector employers have begun to 
downsize.  With GDP growth averaging 8 percent from 
2000-2007, the labor market has been very tight in 
Estonia in recent years.  This should provide a 
cushion for the economy to absorb freed labor during 
the next few quarters, and keep unemployment 
relatively low. 
 
¶7. (U) Looking at consumer credit and confidence, even 
homeowners who purchased during the real estate boom 
in Estonia should be able to continue servicing their 
loans if their employment remains stable.  According 
to Bank of Estonia data for August, loans past due to 
commercial banks were only 6.6 percent of all loans 
outstanding, and only 2 percent were overdue more than 
60 days.  Mortgages are generally fixed rate, or tied 
to EURIBOR; more complex instruments such as 
adjustable rate mortgages (ARMs) are not common in 
Estonia.  As retail sales activity noted above 
indicates, consumer confidence does not appear to have 
taken much of a hit in Estonia despite recent market 
turmoil. 
 
THE BIG PICTURE: Optimism still alive 
 
¶8. (U) Many businesses see a silver lining in recent 
labor market and economic developments.  They report 
that employees are working harder and loyalty to the 
employer, as well as productivity are going up. 
Public opinion generally welcomes government efforts 
to downsize employee numbers in state institutions and 
cut costs.  In a recent TNS Emor poll of 500 
Estonians, 72 percent of respondents said that they 
were not worried about their savings in spite of the 
global financial crisis. 
 
¶9. (SBU) Estonia was already entering an economic 
slowdown in 2007, well before the global financial 
crisis of mid-2008.  While a soft landing is no longer 
possible given the current global economic climate, 
the fact that Estonian consumers have been bracing for 
this since last year may partly explain why consumers 
have remained relatively calm during the last two 
months.  A decline in domestic demand - which began in 
2007, has shrunk Estonia's trade deficit from 19 to 12 
percent as a ratio to 2008 second quarter GDP. 
Exports grew 5 percent over the same period last year 
(their highest level since 1991) while imports have 
fallen 3 percent, in a trend which appears to be 
continuing.  The downturn in the economy has put some 
pressure on the government, but public attention has 
mostly focused on the issue of balancing the state 
budget.  In terms of political fallout, a leading 
polling firm found in late September that support for 
coalition leader Reform Party had declined from 21 
percent to 17 percent this summer.  Karin Reivart, who 
conducted the poll for the firm, said this 4 point 
drop "...could no longer be regarded as a 
statistically insignificant fluctuation, but ... 
 
TALLINN 00000366  003.2 OF 003 
 
 
probably was [because voters] blamed the economic 
difficulties on the Reform Party."  Opposition parties 
have pressed the ruling coalition's economic 
"failures" in the media, but overall public confidence 
does not appear shaky, and post does not anticipate 
political instability to follow. 
 
PHILLIPS