Journal Issue

Republic of Estonia: Selected Issues

International Monetary Fund
Published Date:
March 2009
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1. This chapter reports on an analysis of Estonia’s sectoral balance sheets as of September 2008 (Table 1).

Table 1.Estonia: Intersectoral Asset and Liability Positions, September 2008 (In percent of GDP)
CounterpartEesti PankGeneral GovernmentBanks (Including Leasing)Other private sectorOf which: HouseholdsNonresidentsSector's Overall Position1
Intrument HolderAssetsLiabilitiesNet positionAssetsLiabilitiesNet positionAssetsLiabilitiesNet positionAssetsLiabilitiesNet positionAssetsLiabilitiesNet positionAssetsLiabilitiesNet positionAssetsLiabilitiesNet position
Central bank
In domestic currency0.−−−−0.40.414.0−13.5
Short term0.−−−−13.5
Medium & Long term0.−
In foreign currency0.
Short term0.
Medium & Long term0.
General government
In domestic currency0.
Short term0.
Medium & Long term0.−−0.4
In foreign currency0.−
Short term0.
Medium & Long term0.−
In domestic currency9.−4.315.926.3−10.48.916.5−−5.1
Short term9.−4.71.524.8−23.30.415.8−−1.911.531.7−20.1
Medium & Long term0.
In foreign currency0.−47.3111.280.131.1
Short term0.−1.43.613.3−−4.214.858.9−44.118.473.7−55.3
Medium & Long term0.−
Other private sector
In domestic currency3.
Short term3.
Medium & Long term0.00.4−−−13.3
In foreign currency0.−2.616.493.9−77.618.927.6−8.635.3124.1−88.7
Short term0.−2.322.615.27.4
Medium & Long term0.−−87.39.616.0−6.312.7108.9−96.2
Of which: Households
In domestic currency3.20.03.200016.
Short term3.20.03.200015.80.415.
Medium & Long term0.00.00.00000.78.5−−7.8
In foreign currency0.00.00.00006.242.2−−26.7
Short term0.00.00.00004.
Long term0.00.00.00001.942.0−−30.8
Direct Investment0.00.00.00000.
In domestic currency0.
Short term0.
Medium & Long term0.−−1.4
In foreign currency0.415.4−−6.662.214.947.327.618.−9.393.058.734.3
Short term0.415.4−−1.758.914.844.
Medium & Long term0.−−9.320.616.04.6
Source: Estonian authorities and IMF staff estimates.

Includes leasing companies.

Source: Estonian authorities and IMF staff estimates.

Includes leasing companies.

2. The public sector’s balance sheets are robust, providing strong support to the currency board arrangement. Repeated budget surpluses in recent years have helped build a net asset position to the government (30 percent of GDP in September 2008, of which nearly 8 percent of GDP are in liquid financial instruments). Eesti Pank’s liquid foreign exchange assets exceed its domestic currency liabilities by a small margin, implying a full backing of the monetary base as required by the currency board.

Public Sector Balance Sheet Positions, September 2008

In percent of GDP

Net Financial Asset Positions by CurrencyLiquidity Position by Currency
Foreign exchange
KroonForeign exchangeEquityTotalAssetsLiabilitiesNet PositionAssetsLiabilitiesNet Position
Eesti Pank-13.515.0-1.500.013.5-13.515.40.415.0
Source: Estonian authorities and IMF staff estimates.
Source: Estonian authorities and IMF staff estimates.

3. These cushions are, however, dwarfed by Estonia’s private sector indebtedness. Banks are net creditors vis-à-vis the central bank reflecting high reserve requirements and the absence of a central bank lending facility, consistently with the currency board arrangement. Banks are also net creditors vis-à-vis the nonbank private sector since domestic lending exceeds domestic deposits. But precisely because of this gap, which is filled through funding from abroad, and because of the foreign ownership of the banking sector, banks have a large debtor position vis-à-vis nonresidents—61 percent of GDP in September 2008. The corporate sector is a net debtor visà-vis all other sectors—particularly nonresidents, another manifestation of the importance of foreign ownership in the Estonian economy. As for households, their negligible net asset position (1 percent of GDP) masks a sizable indebtedness to the banking sector, driven by foreign currency mortgage borrowing (which represents 80 percent of household borrowings).

Net asset position by counterpart and currency, September 2008

In percent of GDP

Banks' position
Eesti Pank100010
Other private sector−342−930
Corporates' position
Eesti Pank0000
Households' position
Eesti Pank3003
Other private sector0088
Source: Estonian authorities and IMF staff estimates.
Source: Estonian authorities and IMF staff estimates.

4. Banks are vulnerable to a sudden stop in foreign funding–all of which comes from parent institutions. The bulk of their exposure to nonresidents is debt (47 percent of GDP), while only a small share is equity (14 percent of GDP). Although all of it is held by parent banks, there is a vulnerability to a sudden stop because the parents rely on funds from the wholesale market. Besides, a large part of the debt is short term,2 while banks’ assets have very long average maturities—mortgages for example can have maturities extending up to 40 years. While the exposure of corporates to nonresidents is almost as large as that of banks, it is mostly in the form of equity, and is therefore much more sheltered against direct cuts in credit lines.3 However, to the extent that corporates rely on bank borrowing for their financing—indeed their net liability position to the banking sector is 39 percent of GDP—they would also be affected by a disruption to bank financing.

5. While banks are long in foreign currency, the large exposure of corporates and households to currency risk represents indirect exposure of banks themselves to such risk. At over 30 percent of GDP, the net (positive) foreign exchange position of banks, reflects large net foreign currency claims on the nonbank private sector (78 percent of GDP) and funding liabilities to nonresidents (47 percent of GDP). Banks’ ability to service their external debt hinges on the ability of households and corporates to generate the foreign exchange needed to service their foreign currency bank loans—much of which may not be hedged, particularly as far as households are concerned.

6. Several factors likely contributed to these foreign currency positions. The credibility and robustness of the currency board arrangement and a continuously positive—albeit, until recently, small—differential between kroon and euro deposit rates encouraged Estonians to hold deposits in kroon but borrow in euros. Banks likely priced their deposit and lending instruments in this way in order to avoid large open euro positions—which meant expressing a preference for lending in foreign exchange since their funds were predominantly denominated in hard currency.

7. Since a large share of bank loans are tied to real estate, banks are vulnerable to a deterioration in the real estate market. At least half of bank credit finances real estate activities and about 74 percent of all bank loans are backed by real estate collateral. A downturn in the real estate market would not have a major impact on the performance of these loans so long as borrowers remained able to service them. However, to the extent that borrowers rely on real estate capital gains to meet their financial obligations, a real estate downturn could lead to loan losses. Also, should a change in the global environment lead to rising EURIBOR rates, to which mortgages are linked, borrowers could increasingly find it difficult to service their mortgage debt. A more pressing risk currently is that the severe economic downturn hits households’ incomes and thus their ability to service mortgage debt, in which case the rapid growth of NPLs could adversely affect banks’ balance sheets and profitability. So far, real estate prices have declined by about 20–30 percent on average from their 2006 peak, but banks have held up relatively well—although 60-days overdues in housing loans have quadrupled in the last year alone, they remained very low, at 1½ percent of total housing loans in September 2008.

8. The banking sector is also exposed to significant maturity mismatches. As is normal for banks, maturity transformation creates an exposure to both roll-over and interest rate risks. Banks’ exposure to interest rate risk is overstated in the data for two reasons. First, borrowing from parent banks is recorded as short-term deposits from abroad regardless of actual maturity.4 Second, mortgages generally have floating rates—tied to 6-month EURIBOR—and are therefore more akin to short-term instruments in terms of frequency of repricing. Interest rate risk is thus transferred to households. Keeping these caveats in mind, banks’ exposure to roll-over risk appears pressing since their short term foreign exchange assets only cover 25 percent of their short term foreign exchange liabilities—the ratio is just slightly beefed up to 27 percent if one takes into consideration the unencumbered foreign exchange reserves of the central bank (1½ percent of GDP).

Balance Sheet Positions in Liquid Assets by Currency, September 2008

In percent of GDP

Foreign exchange
AssetsLiabilitiesNet PositionAssetsLiabilitiesNet Position
Eesti Pank0.013.5−13.515.40.415.0
Other private sector9.61.18.518.315.03.3
Source: Estonian authorities and IMF staff estimates.
Source: Estonian authorities and IMF staff estimates.

9. In sum, the salient vulnerabilities are banks’ exposure to funding and credit risk, and nonbank private sector’s exposure to currency risk, while strong public sector balance sheets provide support to the currency board arrangement.


    Choueiri N.2006“Assessment of Balance Sheet Exposures in Estonia”Republic of Estonia: Selected Issues,IMF Country Report No. 06/419(Washington: International Monetary Fund).

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Prepared by Nada Choueiri.


The data overstate the amount of short-term debt because all bank borrowing from parent banks is recorded under currency and deposits, so as short-term, following the new methodology adopted by the central bank in 2008. However, as of September 2008, nearly 60 percent of bank borrowing from abroad was long-term (over 1 year maturity) at original maturities, and about 40 percent of that borrowing was long-term at remaining maturities.


The larger part of the external debt of corporates seems to be loans from international institutions such as the EIB, including with government guarantees for public enterprises—and these should be relatively sheltered against sudden stops.


But IIP data prior to 2008, available on the central bank’s website, recorded such borrowing under short-term or long-term loans depending on the maturity.

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