Viewing cable 08VILNIUS866
Title: LITHUANIAN BANKS: RISK OF CONTAGION LARGELY DUE

IdentifierCreatedReleasedClassificationOrigin
08VILNIUS8662008-10-17 08:50:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
VZCZCXRO7845
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVL #0866/01 2910850
ZNY CCCCC ZZH
P 170850Z OCT 08
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC PRIORITY 2947
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000866 
 
SIPDIS 
 
E.O. 12958: DECL: 10/17/2018 
TAGS: ECON EFIN LH
SUBJECT: LITHUANIAN BANKS:  RISK OF CONTAGION LARGELY DUE 
TO CONTINGENCIES OUT OF THE GOL'S CONTROL. 
 
REF: A. VILNIUS 858 
     ¶B. VILNIUS 855 
     ¶C. VILNIUS 766 
 
Classified By: Ambassador Cloud for reasons 1.4 (b) and (d). 
 
¶1.  (C) Begin summary.  Lithuania faces economic risk if 
weakness appears in the Scandinavian banking sector or if 
problems in other Baltic nations are interpreted to involve 
the entire region.  GDP growth is predicted to continue 
slowing, but remain positive in the near future, with 
inflation declining next year, unemployment experiencing a 
slight rise and the budget deficit growing.  Although 
Lithuania experienced a property bubble, the end of the rise 
in real estate prices was anticlimactic with the bubble 
deflating rather than exploding.  Parliamentary elections 
will bring a change of government to Lithuania, with the new 
leaders facing the unenviable task of governing amidst 
declining budget revenue.  End summary. 
 
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Reliant on Swedes and Guilt by Association 
------------------------------------------- 
 
¶2.  (C) Although the situation in Lithuania appears stable so 
far, there are risk factors for the global financial crisis 
spreading here.  The biggest concerns, unfortunately, are 
factors over which the GOL has almost no control.  As 
reported ref A, banks in the domestic market are largely 
Scandinavian-owned (especially Swedish).  If the parent banks 
are safe, so the Lithuanian branches will be.  However, if 
instability strikes the Scandinavian banking system, 
Lithuanian authorities will be unable to protect the 
branches.  Another concern, voiced to us by executives of 
Sampo Bank (part of the Danske group) and SEB Bank is that 
problems faced by the other Baltic states will be assumed to 
be present in Lithuania as well and investors could act 
accordingly.  Sampo Bank CEO Gintanas Galvanauskas told us 
his concern is that the three Baltic countries will be viewed 
as one region, if problems in an individual country are 
discovered. 
 
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By the Numbers -- and they're not good 
-------------------------------------- 
 
¶3.  (C) In addition to risks beyond the GOL's control, the 
domestic economy has its own weaknesses.  GDP growth in the 
first quarter as compared to the corresponding quarter in the 
previous year was 7 percent.  In the second quarter, it 
declined to 5.5 percent.  Projections for overall GDP growth 
for 2008 range from 3.9 to 6.1 percent.  For 2009, however, 
GDP growth projections do not look good.  While some banks 
estimate as high as 5.5 percent DNB Nord Bank recently 
revised its estimate to zero.  EU Budget Commissioner 
Grybauskaite (protect) also predicted zero growth for 2009. 
Gitanas Nauseda, a senior economist at SEB Bank, told us he 
believes that for a country that still has a ways to go to 
reach the development level of other industrialized 
countries, this level of gQwth will have effects that are 
similar to a recession, even if growth is not negative. 
 
¶4.  (U) Inflation in July 2008 compared to July 2007 was 12.2 
percent.  The same comparisons for August and September show 
12 percent and 11 percent.  Overall inflation projections for 
2008 range from 10 to 11.8 percent.  For 2009, inflation 
projections range from 4.1 to 8.8 percent. 
 
¶5.  (U) Unemployment, too, may become a problem.  In the 
first quarter this year the rate was 4.5 percent and for the 
second was 4.9 percent.  Overall unemployment for 2008 
according to Swedbank is projected to be 5.3 percent, rising 
to 5.8 percent in 2009. 
 
¶6.  (U) The Ministry of Finance estimates this year's budget 
deficit will be 1 billion LTL, approximately 1.7 percent of 
GDP.  They estimate next year's budget deficit will be 2.6 
billion LTL or approximately 2.36 percent of GDP.  Some 
commentators have said these estimates should be viewed as 
optimistic as they anticipate balance on municipal budgets 
and near balance on Lithuania's social security budget. 
 
--------------------------------------------- - 
The Bright Side:  Property Bubble Didn't Burst 
--------------------------------------------- - 
 
¶7.  (SBU) The property bubble appears to have deflated, 
rather than burst.  Real estate prices have plateaued and 
lending has slowed -- but the latter was because of more 
responsible lending practices over the past six months. 
 
VILNIUS 00000866  002 OF 002 
 
 
After a period of heady growth, this slowdown was not 
precipitous -- good news for Lithuania. 
 
----------------------------------------- 
A Poisoned Chalice for the New Government 
----------------------------------------- 
 
¶8.  (C) The timing of the financial crisis is not helped by 
the fact that Lithuania is in the midst of an election.  The 
first round of parliamentary elections took place October 12 
and the second round will come October 26.  The current (and 
soon-to-be caretaker) government was ineffective at tackling 
inflation -- to the contrary, it took steps that will 
exacerbate the problem.  The new government will face a 
budget environment constrained by declining tax revenues. 
Nauseda told us that the current government has not listened 
to expert economic advice.  He said that PM Kirkilas did not 
want to hear unpleasant news and postponed decisions. 
Galvanauskas echoed Nauseda and added that the current 
government did not try to move away from deficit financing. 
Both men told us they had some hope for the future because 
that the party likely to lead after elections actually 
listens to expert economic advice. 
 
------- 
Comment 
------- 
 
¶9.  (C) Lithuania, relative to many of its Western European 
brethren, still shows a good GDP growth level and enviable 
levels of unemployment.  Our interlocutors emphasize that 
Lithuania is not Iceland.  Nonetheless, Lithuania is 
experiencing an economic slowdown that began before the 
recent economic turmoil in the United States.  The GOL's only 
economic lever is fiscal policy, as the Lita is pegged to the 
Euro.  Unfortunately, the outgoing government took few steps 
in healthy economic times to rein in government expenditures. 
 Hence, needed reforms may be delayed or more painful as the 
new GOL faces a different economic situation than its 
predecessors. 
 
CLOUD