Trouble in the Baltic States

The small Baltic states, Estonia with a population of 1.34 million, Latvia with 2.26 million and Lithuania with 3.36 million have been hit hard by the world financial crisis. 

GDP in Lithuania grew 2.95% in the third quarter from the same period last year. Growth has decelerated rapidly from the 10.54% recorded in the third quarter of 2007.   Lithuania, however, has fared better than its two fellow Baltic states.  GDP in Estonia in the third quarter of 2008 was actually 3.76% below the corresponding period of 2007.  The comparable figure for GDP in Latvia was 4.68%.  The year-to-year changes in GDP for the three countries are shown in the first chart. 

The speed and seriousness with which the world financial crisis had hit the Baltics is due in part to the fragility of their economies as a result of years of running large current account deficits and borrowing abroad.

The second chart shows the current account balances as a percent of GDP for the three countries.  The ratios for all three countries have generally been in the negative teens, but Latvia has had current account deficits/GDP as high as -28%. 

All three countries have borrowed heavily abroad.  The gross external debt in euros for each country is shown in the third chart and the ratio of debt to GDP is shown in the table below. Lithuania's debt to GDP ratio rose from 42.5% in 2000 to 72.2% in 2004.  In Estonia the ratio rose from .53 in 2000 to 1.12 in 2007, while the ratio in Latvia, rose from .61 to 1.34.

Latvia recently agreed to a $105 billion stabilization package with the IMF and the EU designed to avoid the devaluation of its currency which is tied to the Euro as are the