Baltic states to create a pan-Baltic capital market

By Axel  Reiserer

Baltic states to create a pan-Baltic capital market

Left to right: European Commission Vice-President Valdis Dombrovskis, Estonia’s Minister of Finance Toomas Tõniste, Latvia’s Minister of Finance Dana Reizniece-Ozola, Lithuania’s Minister of Finance Vilius Šapoka and EBRD Vice President Pierre Heilbronn.

Joint initiative – supported by European Commission and EBRD – will harmonise regulation to facilitate investment

Estonia, Latvia and Lithuania have agreed to create a pan-Baltic capital market to strengthen their economies and stimulate investment to create jobs with support of the European Commission (EC) and the EBRD.

The Ministers of Finance – Toomas Tõniste for Estonia, Dana Reizniece-Ozola for Latvia and Vilius Šapoka for Lithuania – signed a Memorandum of Understanding (MoU) in Brussels today in which the parties agree to harmonise capital market regulations and dismantle investment barriers.

The goal of the initiative is to attract investment through the creation of a common capital market by combining the strengths of the three Baltic states and overcoming the constraints they often face due to their limited size.

The signing took place in the presence of European Commission Vice-President Valdis Dombrovskis and EBRD Vice President, Policy and Partnerships, Pierre Heilbronn. The signatories to the MoU recognise the support provided by the European Commission and the EBRD to the efforts of building a common capital market in the Baltic states.

The agreement sets out the commitment of the three Baltic states to strengthen their cooperation in the development of a common capital market. The three states agree to work together on the design and implementation of the necessary measures, including the establishment and improvement of the underlying legal framework, the introduction of new instruments (for instance, covered bonds and securitisation) and the creation of the necessary market infrastructure.

One of the first projects under the agreement is the creation of a legal framework for a pan-Baltic covered bond. The work on this project is done in cooperation with the EBRD and the European Commission’s Structural Reform Support Service (SRSS).

For further progress the parties will adopt a detailed action plan based on the priorities and possible areas of cooperation as set out in the MoU. They also agree to create a steering committee representing the governments of Estonia, Latvia and Lithuania to oversee progress in the implementation of the measures underpinning the Baltic capital markets.

Estonia’s Minister of Finance Toomas Tõniste: “Functioning capital markets are crucial for the economy as they diversify the enterprises’ financing sources, enable them to grow, fund expansion and create new jobs, and thus increase the added value in the economy. So achieving the well-functioning capital market should be our common purpose and implementing only a few isolated and local measures will not suffice. Hopefully this memorandum is an important step bringing coordinated activities and measures towards a joint capital market, attracting all the local market investors and also foreign investors.“

Latvia’s Minister of Finance Dana Reizniece-Ozola: “Our common efforts will ensure significant economic benefits, for instance, a pan-Baltic asset class in covered bonds is more likely to be attractive for international investors thus improving the available funding options for the local capital market. We also expect to multiply the number of new IPOs in our equity market, and mobilise our local investment by pension funds and other institutional investors. All measures together should lead to the long-term objective achieving the emerging market status that would further facilitate capital inflow and deepen access to finance.”

Lithuania’s Minister of Finance Vilius Šapoka: “It is gratifying that the Lithuanian and EBRD initiative on covered bonds and the securitisation regulatory framework has been expanded into the Baltic capital markets development project. This memorandum is an example of good cooperation and synergy among the three Baltic states. I strongly believe that this project will create a better access to finance for small and medium-sized enterprises, increase competition in financial markets and expand investment opportunities to new financial instruments, thus contributing to economic growth, job creation and financial stability.”

European Commission Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union: "I welcome today's agreement among the three Baltic states to developing common capital markets – it is another step on the road to creating a Capital Markets Union. The Commission fully supports regional initiatives to facilitate cross-border investments and integrate member states' capital markets. Our Structural Reform Support Service stands ready to step up its support for reforms that modernise economies, strengthen competitiveness, and encourage investment and looks forward to working with the three Baltic states on the creation of new instruments in the region."

EBRD Vice President Pierre Heilbronn: “We welcome the commitment of the three Baltic states to creating a regional pan-Baltic capital market and are very pleased to have supported this achievement together with our EC counterparts. This is in line with the EC priority to build a Capital Markets Union for all member states as well as with the country strategies supported by our shareholders. We see this as an important development in the Baltic states’ progress towards ever more advanced economies. Combining and harmonising the capital markets will further increase their attractiveness as an investment destination, which in turn will boost performance, create jobs and strengthen resilience. The EBRD is happy to lead the first joint project supporting the creation of pan-Baltic covered bonds. This will be a first test for the market and for implementation of the MoU.”

The European Commission's SRSS supports member states in designing and implementing growth-enhancing structural reforms. Under the Capital Markets Union initiative, the SRSS provides technical support to member state authorities to assist them in their efforts to enhance capital markets, leading to better access to finance and job creation. The Structural Reform Support Programme – in place since May 2017 - has allowed the Commission to increase the level of technical support that it provides in the area of capital markets development, supporting among others the creation of a legal framework for a pan-Baltic covered bond.

Supporting the development of local capital markets is one of the EBRD’s strategic priorities. Well-functioning and efficient capital markets are crucial to funding the local economy and allowing it to grow. The EBRD supports this development through a tailored approach that combines investments, policy engagement and technical assistance. The EBRD has been engaged in Estonia, Latvia and Lithuania since their independence and to date has invested almost €2 billion in close to 250 projects there.