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)| false Gulde-Wolf, Anne-Marieand Peter Keller, 2002, “ Another Look at Currency Board Arrangements and Hard Currency Pegs for EU Accession Countries”, in: The Choice of Exchange Rate Regime and Monetary Policy Rule in Accession to the EU and Entry to EMU ( Tallinn: Bank of Estonia).
Herzberg, Valerie, 2010, “Assessing the Risk of Private Sector Debt Overhang in the Baltic Countries,” IMF Working Paper Forthcoming.
Ingves, Stefan, 2010; “The Crisis in the Baltics—The Riksbank’s Measures, Assessments and Lessons Learned”, speech at the Riksdag Committee of Finance, Stockholm February 10, 2010.
Knöbl, Adalbert, Sutt, Andres and Basil Zavoico, 2002, “The Estonian Currency Board: Its introduction and Role in Early Success of Estonia’s Transition to a Market Economy”, IMF Working Paper 02/96.
Martin, Reiner and Caludia Zauchinger, 2009, “Boom and Bust in the Baltic Countries— What Lessons for the ‘Pilgramage’ to the Euro Area?”, Paper presented at the EACES/University of Brasov IWH conference, Brasov, Romania, September 4-6, 2009.
Pérez and Sánchez, 2010 “Is there a signaling role for public wages? Evidence for euro area based on macro data”, European Central Bank Working Paper Series, No. 1148, January.
Rosenberg, Christoph and Robert Sierhej, 2007, “Interpreting EU Funds Data for Macroeconomic Analysis in the New Member States”, IMF Working Paper WP/07/77.
Sancak, Cemile, Ricardo Velloso, and Jing Xing, 2010, “Tax Revenue Response to the Business Cycle,” IMF Working Paper 10/71, March 2010.
The authors would like to thank Zhaogang Qiao for his research assistance, Stephanie Eble, Alvar Kangur and Alex Klemm for their input on the fiscal section, and Anne-Marie Gulde, Mark Griffiths, Uldis Rutkaste, Darius Abazoris, Andres Sutt and Alex Klemm for their comments.
For an analysis of the Baltics’ exchange rate choices see Gulde-Wolf and Keller (2002). Lithuania and Estonia instituted currency boards, initially vis-à-vis the US Dollar in Lithuania, and to the Deutsche Mark in Estonia. Latvia chose a narrow exchange rate band against the SDR. By end-2005, all three Baltics had anchored their currencies on the euro.
For example, the Fund initially advised against Estonia’s decision in April 1992 to adopt a currency board arrangement on the grounds that the supporting fiscal policies would be too difficult to implement (Knöbl, Sutt and Zavoico, 2002).
The Swedish Riksbank provided a bridge loan while negotiations with international lenders were ongoing.
The definition of NPLs and the degree to which banks are recognizing their losses may vary across countries.
As documented by the European Commission (2010), Baltic tax systems rely on low and flat direct tax rates, which result in fluctuations in real wages and employment, having a proportionally larger impact on consumption.
For example, effective VAT collections (amount VAT collected relative to the taxable base compared to the statutory VAT rate) are much higher in Estonia than in the other two Baltics (see Reckon, 2009).
The stock of unclaimed VAT refunds amounted to 4 percent of GDP in Latvia and 1 percent of GDP in Lithuania. See Sancak, Velloso and Jing, 2010 for a discussion of how tax revenue and compliance responds to the business cycle.
Latvia and Lithuania raised the standard rate by 3 percentage points to 21 percent, and Estonia by 2 percentage points to 20 percent.
This finding is consistent with that from other European countries where the size of government is small and the degree of unionization is low results in changes in public sector exerting lesser effects on private sector pay (see Pérez and Sánchez, 2010).
For example, average wages in the construction sector had fallen by 25 percent Lithuania in 2009, while in Latvia jobs in the construction sector halved attributing to more than 40 percent of total job losses in 2009.
The minimum period over which the compulsory social insurance contributions were paid was cut from 12 months in the last 18 months to 9 months over a period of one year. This measure is supposed to expire in December 2010.
Comparisons of NPLs are, however, difficult. In Estonia, loans are classified as non-performing when they are past 60 days due. In Latvia, the definition includes loans 90 days past due. In Estonia the definition includes only impaired loans that are past due by 60 days. In Lithuania, loans are classified as past due more than 60 days but not impaired plus any impaired loan.
Most mortgages in the Baltics are at variable rates and indexed to 6 month EURIBOR, reset twice a year.
While banks, especially foreign-owned ones, did restructure loans, it is not clear if this entailed NPV reductions even for unviable debtors.