How Sweden sent Estonian economy into free fall

Sweden‘s influence over the Estonian economy has been generally strong and positive, but in 2009 Sweden made some decisions that sent the Estonian economy into a free fall, investor Stefan Andersson writes in a Letter To The Editor at  the Estonian newspaper Äripäev.

“Whether you like it or not, Swedbank and SEB act in Estonia as a central bank. It means that if these institutions for one reason or another decide to change their terms, it will have an effect on short-term money supply in Estonia and Estonia’s GDP.”

Stefan Andersson

(Article in English)

Sweden’s influence over the Estonian economy has been generally strong and positive, but in 2009 Sweden made some decisions that sent the Estonian economy into a free fall, the swedish small investor Stefan Andersson writes in his commentary article, published by the Estonian news paper Äripäev.


“Whether you like it or not, Swedbank and SEB act in Estonia as a central bank. It means that if these institutions for one reason or another decide to change their terms, it will have an effect on short-term money supply in Estonia and Estonia’s GDP. There are also other areas how events in Sweden influence Estonia.”

Here’s Mr. Andersson’s description of what happened in 2009:

1) Estonians with money were taken hostage

Namely, Swedish banks started to offer Estonian depositors unreasonably high interest rates. For some reason it was decided to attract more deposits from the Baltic customers in banks. Although banks had access to cheaper financing in Sweden and elsewhere, it was decided to improve the deposit-and-loan ratio of Baltic customers. It was also decided to pay a high premium for kroon deposits to keep Estonians from exchanging kroons to euros.

The situation became so absurd that at the end of the year banks in Estonia had about 90 billion kroons in kroon deposits, while kroon loans had fallen to 30 billion. This means that Swedish banks were prepared to pay Estonian depositors and especially kroon depositors good money not to do anything more practical with their money. So Swedes paid Estonians for not investing in Estonian economy. The Estonian government made matters worse and contributed it by exempting private depositors from paying income tax.

2) Estonians were unable to borrow

In a similar way as the flow of depositors’ funds into the economy was restricted, also borrowing was restricted. The cost of borrowing went up sharply and limited amount of loans were issued. The influence on money supply was clearly limiting.

3) Money of Swedish fund investors stays out

Sweden has one large share fund – East Capital Baltikum – that is targeted at the Baltic states. In the summer Swedes started to invest funds in it, but instead of investing in Baltic enterprises, Swedish fund managers purchased Swedish bank shares and Swedish government bonds. So the money never reached Estonia although Swedish small investors already then wanted to buy assets that had become cheap.

4) Swedish media warned the public about Baltic fallout

Although Swedish media had said nothing about Baltic states during the boom years, 2009 was nothing but warning about the Baltic fallout although it was too late to warn anyone. This reduced the interest of foreign investors towards the Baltic market and reduced FDI.

5) Swedish krona became cheaper against Estonian kroon

With its very low interest rates, the Swedish central bank allowed the euro (and the kroon) to gain against the Swedish krona. This worsened the opportunities of Estonian manufacturers to sell their products on export markets and reduced money inflow into Estonia.

In summary, the decisions made in Sweden depleted Estonia of money. In short term, less money supply means an economic downturn and bigger fear. Since the Swedish measures affected Estonian share and real estate prices, the winners turned out to be investors who were able to buy these assets in 2009. Perhaps the biggest winner was Teliasonera that managed to buy out the Estonian state from Eesti Telekom for a fairly cheap price.

And here’s what he believes will happen in 2010:

“However, 2010 will be very different and the situation started to change already at the end of 2009. In spite of Sweden’s developments, money started to flow back into Sweden. Since Estonians had cut their imports to minimum, EU structural aid funds were pouring in and Estonian wages had fallen more than the Swedish kroon to the Estonian kroon, exports recovered. Swedish media stopped publishing negative reports about the Baltic situation. A list of things that will happen in 2010 includes:”

1) Interest rates paid on deposits are coming crashing down

Unreasonably high interest rates paid on kroon deposits have already started to fall and are no longer attractive to Estonian investors who want to invest in real assets. “Hostages are getting free.”

2) Lending will recover.

Banks are already saying that borrowing terms will improve. Since asset prices are very low, so is the risk of lending.

3) Swedish private investors will find Estonia anyway.

Even if large Swedish fund managers fail to channel their funds into Estonia quickly, investors will find a way. When it happens, even large fund managers have to follow.

4) Estonia’s image will improve

While in 2009 Swedish media pictured Estonia as a doomsday country, it will reverse 180 degrees in 2010 and welcome Estonia as the new member of euro zone.

5) Swedish krona will strengthen

Swedish krona has already strengthen notably and the position of Estonian exporters is gradually improving. In spite of having been naive in the boom years 2006 and 2007 and having made the Estonian situation worse in crisis times 2008 and 2009,

Source: bnn.ee

Related by The Econotwist:

The Baltic Lab Rat

“Not Grounded in Reality”

The Relative Reality

More Billions Lost In The Baltic

East European banks needs $304bn

Baltic Loan Losses Could Double

Crisis In A New Light

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