While the banks latest December monthly report implies that struggling Baltic economies are on the mend, the ECB is actually far more worried about the Baltics according to confidential documents acquired by Bloomberg.
Essentially, the bank is worried that Baltic countries could be on the verge a new debt crisis, partly due to their pegged currencies.
Bloomberg: “the authorities in the Baltic states may not be able to prevent a renewed emergence of macro-economic imbalances and a repetition of the boom-bust cycle,” the ECB said in a document dated Nov. 17 and prepared for a meeting of the EU’s economic and finance committee.
“The experience of the Baltic states suggests that, for countries that have opted for pegging tightly their exchange rates, there is a significant risk that relatively low interest rates lead to excessive domestic borrowing and the emergence of asset price bubbles,” the ECB said.
The boom-to-bust fate of the Baltic states has been exacerbated by euro-denominated borrowing since the countries joined the EU more than five years ago. That’s obliged central banks to stick more rigorously to their euro pegs or risk leaving households and businesses unable to service their debt.
Note the far more optimistic tone shown in the ECB’s public monthly report below. This could be yet another example of how central banks need to be more transparent. While telling the hard truth can destroy market confidence in the near-term, it’s far better than prolonging problems.