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Niamh Sheridan, Mr. Alfred Schipke, Ms. Susan M George, and Mr. Christian H. Beddies

Abstract

In just over a decade after independence, the three Baltic countries, Estonia, Latvia, and Lithuania, have transformed themselves into fully functioning, small open-market economies that will be joining the European Union. Capital Markets and Financial Intermediation in The Baltics analyzes the financial systems of the three countries and discusses some of their unique characteristics. The study also examines current distortions of the systems and discusses whether or not the Baltics should move from an almost exclusively bank-based system to one that relies more on capital markets. In the process, it addresses issues of corporate governance and regional integration.

Niamh Sheridan, Mr. Alfred Schipke, Ms. Susan M George, and Mr. Christian H. Beddies

Abstract

In only a decade after independence, the three Baltic states—Estonia, Latvia, and Lithuania—have transformed themselves into fully functioning, small open market economies that are on the verge of joining the European Union. The three Baltic states, jointly with the other seven accession countries of the first wave, will join the European Union in May 2004 and are expected to seek membership in the European Exchange Rate System (ERM2) shortly thereafter. Over the past decade, economic policies and developments in the three countries have been similar in many respects. All three have used the exchange rate as a nominal anchor to stabilize the economy and to impose fiscal discipline. Estonia and Lithuania chose a hard peg in the form of a currency board, while Latvia pegged its currency to a basket of currencies through an SDR peg. Although considered to be temporary arrangements until adoption of the euro, the respective exchange rate systems have served the countries well and withstood a number of shocks, the most extreme of which was the 1998 financial crisis in Russia.1

Niamh Sheridan, Mr. Alfred Schipke, Ms. Susan M George, and Mr. Christian H. Beddies

Abstract

In channeling savings to investment, the financial system contributes to economic performance through mobilizing savings and allocating them efficiently, mitigating market imperfections, and promoting good corporate governance control. In this vein, the following section focuses on the state of development of the financial systems in the Baltics and the role of both bank-based financial intermediation and that of capital markets in allocating financial resources and attempts to identify potential obstacles that may hamper the sound functioning of the financial system and its future growth. This section also provides the background for the discussion of issues related to small open economies more generally.

Niamh Sheridan, Mr. Alfred Schipke, Ms. Susan M George, and Mr. Christian H. Beddies

Abstract

There is a growing consensus in the literature20 that the development of a well-functioning financial system generally plays an important and positive role in the promotion of long-run economic growth and economic stability. This consensus has emerged relatively recently from a growing body of literature based on both theoretical considerations as well as empirical evidence that shows a positive correlation between various measures of financial development and economic growth. There is also some empirical evidence that suggests a causal relationship indicating that financial system development is conducive to economic growth. In addition, another wave of research has looked more closely at the channels through which the financial system enhances growth and has identified a number of specific features that seem to have a potential for enhancing economic growth. The goal of this section is to examine if and in what way the Baltics could develop financial systems with a view to promoting increased long-run growth.

Ms. Froukelien Wendt, Peter Katz, and Alice Zanza
The key objective of this note is to support authorities in their decision making about the optimal organization of central securities depositories (CSDs) in their country. For the purpose of this note, a CSD is defined as an entity that provides securities accounts, a securities settlement system, and central safekeeping services to market participants, which can be banks and other financial institutions. Authorities in developing markets, in particular central banks, may grapple with two questions: (1) whether to pursue a single CSD to increase market efficiencies and benefit from economies of scale and scope and (2) whether to partake in the governance of the CSD as owner or operator. This note presents seven considerations for authorities to take into account when answering these questions and determining the best model for their country.
International Monetary Fund
This Technical Note provides an analysis of the evolution of the observance of the International Organization of Securities Comteams (IOSCO) objectives and principles of securities by the Lithuania Securities Commission (LSC). The analysis focuses on the Core Principles for which there have been changes in observance since the IOSCO Detailed Assessment was carried out in the framework of the Lithuania Financial Sector Assessment Program (FSAP) in 2001. The analysis is presented principle by principle or for a group of principles depending on the nature of the findings by comparison with the Detailed Assessment of 2001.
Niamh Sheridan, Mr. Alfred Schipke, Ms. Susan M George, and Mr. Christian H. Beddies

Abstract

As previously mentioned, one of the characteristics of the current structure of the Baltic states’ financial systems is that they are dominated by bank financing. Over the course of the last several years, the percentage of foreign ownership has increased dramatically. This is especially true of Estonia and Lithuania, while somewhat less so in Latvia. Although the degree of foreign bank ownership is relatively high, other small open economies (such as New Zealand and Malta) are also notable for the dominance of foreign bank ownership. The increase in foreign ownership in the Baltics reflects to some degree a conscious decision by the authorities to attract strategic foreign investors in the aftermath of the banking crises of the 1990s.

International Monetary Fund

This Technical Note provides an analysis of the evolution of the observance of the International Organization of Securities Comteams (IOSCO) objectives and principles of securities by the Lithuania Securities Commission (LSC). The analysis focuses on the Core Principles for which there have been changes in observance since the IOSCO Detailed Assessment was carried out in the framework of the Lithuania Financial Sector Assessment Program (FSAP) in 2001. The analysis is presented principle by principle or for a group of principles depending on the nature of the findings by comparison with the Detailed Assessment of 2001.

International Monetary Fund

This Selected Issues paper and Statistical Appendix analyzes four issues relevant to the achievement of high-quality economic growth in Lithuania, namely the composition of government expenditure, financial sector development, foreign direct investment, and entry and exit of commercial enterprises. The paper reviews the composition of public expenditure and draws some comparison with other countries in the region. A discussion of the reforms to date in the area of public expenditure management is presented. The paper also highlights the possible pressures for additional expenditure in a number of areas.

Niamh Sheridan, Mr. Alfred Schipke, Ms. Susan M George, and Mr. Christian H. Beddies

Abstract

The Baltic states are on the verge of joining the European Union. This event represents a mile-stone in the completion of the transition process in the three countries. During the past ten years of economic transformation, the allocation of savings and investment took place largely in the form of internally generated funds and through the employment of strategic investors in the privatization process. Associated with this were substantial improvements in efficiency, which contributed to the countries’ strong growth performance. Now that the transition is largely complete and the Baltic states have moved closer to the production possibility frontier, the continued, efficient allocation of savings and investment will have to rely more prominently on the financial system. This will also be one factor to ensure continued high rates of productivity growth. A positive relationship between the financial system development of a country and its economic growth has also been reflected in a growing body of literature.