Ukraine Joins Euro Woes to Raise Estonia Risk, Central Bank Says

Estonian banks face increased risks because of the slow recovery among euro-area lenders and political turmoil following Russia’s annexation of Crimea from Ukraine, the central bank said.

The increased uncertainty in the past half year threatens to curb trade and damp economic growth by delaying investment projects and slowing consumption, according to a report on financial stability released today by Eesti Pank, based in the capital, Tallinn.

Economic growth in Estonia, which adopted the euro in 2011, slowed to a four-year low of 0.8 percent in 2013 after government spending declined and trade with neighboring Russia weakened. The government this month cut its forecast for the 2014 expansion to 2 percent from 3.6 percent as sanctions imposed against its former Soviet master may dent exports.

“Despite the recovery of economic growth, the banking sector in the euro area still has relatively large levels of problem loans,” the central bank said in the report. “Political uncertainty has increased following the events in Ukraine and with it uncertainty about economic developments in trading partners.”

While banks didn’t contribute to a 20 percent increase in property prices last year, the central bank reserves the right to tighten policy if it sees a change in the approach of lenders, Governor Ardo Hansson told a news conference in Tallinn. The central bank is analyzing whether it should impose a minimum down-payment requirement on mortgages or limit the ratio of loan versus borrower’s income, deputy central Governor Madis Muller told the same news conference.

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