Deepening capital markets in the Baltic states

The Baltic states are advanced transition economies with strong institutions, European Union (EU) integration and high banking sector capitalisation. However, their small and shallow capital markets have left Estonian, Latvian and Lithuanian companies struggling to secure sufficient financing for growth. This has had a particular impact on small and medium-sized enterprises (SMEs) and midcaps.

Some of the barriers to capital market development are structural. Estonia, Latvia and Lithuania are small national markets with concentrated banking sectors and thin issuer and investor bases. The availability of nonbank finance is limited, lending practices tend to be conservative, and collateral requirements for credit are strict, while rather limited depth in local corporate bond markets means these countries have faced difficulties in absorbing larger transactions.

To help SMEs and midcaps across the Baltics states access the finance they need to grow, the EBRD has focused on three core priorities in developing the region’s capital markets:

• capital market integration across the three countries
• diversifying financing sources beyond bank lending
• supporting the development of the local private equity and venture capital ecosystem.   

These aims are at the centre of a memorandum of understanding (MoU) signed by the finance ministries of Estonia, Latvia and Lithuania in 2017, with support from the EBRD, the European Commission and Nasdaq. The MoU included the explicit goal of introducing new financial instruments, including for covered bonds and securitisation. 

To put the MoU into practice, the EBRD helped create a pan‑Baltic steering committee, bringing together the national authorities and the European Commission. Working jointly, they have reviewed laws across the region and aligned national frameworks with EU standards. This led to the adoption of aligned covered bond legislation in Estonia in 2019, Latvia in 2021 and Lithuania in 2022. Lithuania also introduced a framework for securitisation, which was further supported by EBRD technical assistance to national development bank ILTE to help it build the skills and systems needed to launch the Baltic states’ first true-sale public securitisation in 2025. 

Alongside policy dialogue to foster the legal, institutional and market foundations for capital market development and integration, the EBRD has used financing to help develop and demonstrate the feasibility of new capital market instruments. This resulted in Baltic companies and other entities issuing more than €2.4 billion in bonds with EBRD participation in 2025 alone, marking a significant boost in their access to non-bank sources of financing. 

Access to non-bank financing has also been advanced thanks to EBRD support for corporate debt issuance, including an investment framework of up to €75 million to help develop the pan‑Baltic market for commercial paper – short-term, unsecured debt that companies issue to cover liquidity or working-capital needs. Other successes have included four transactions with Lithuanian retailer Maxima Grupė, including a €40 million debut bond issue that was the biggest ever bond issued on the local market by a private-sector company from the Baltic states at the time.

Estonian Luminor Bank also undertook its first covered bond issue with EBRD participation, as the Bank followed up on its support for new legislation by helping to demonstrate the new product’s viability. The pan-Baltic covered bonds feature assets from all three countries in their cover pool. Listed on the Irish stock exchange, they saw strong take‑up by private investors, illustrating confidence in the product.

To enhance the investment climate in the Baltic states, the EBRD supported Latvia and Estonia with reforms to align their legislation with international standards. The rule changes related to close-out netting and financial collateral (which Lithuania had already implemented), and reduced risks associated with counterparty credit and boosted capital market activity in the region. 

The Bank also helped to raise the profile of all three Baltic states among international investors by advocating for the development of the MSCI Baltic States Index. Launched in 2023, it consolidates the Estonian, Latvian, and Lithuanian markets into a single regional index and aligns with market integration efforts, supporting deeper cross‑border capital flows.

The EBRD has helped to trigger a structural shift in how capital markets function in the Baltic states and laid the groundwork for further growth in the depth and breadth of the region’s capital markets.

The Bank’s support for better regulation and capital market infrastructure has fostered a shift from a nationally segmented approach towards a more regionally integrated market. The result is that SMEs and midcaps now have access to a broader range of capital instruments beyond traditional bank financing and a common regulatory language that supports the involvement of international private investors. 

The Baltic states are also seeing increasing issuer and investor appetite, after EBRD-anchored first-of-their-kind instruments raised confidence in the markets. Private investors accounted for 85 per cent of the inaugural covered bond issue by Luminor, signalling early market acceptance and paving the way for future covered bond issues by LHV Bank and Coop Pank. Repeat bond and commercial paper issuance by Lithuania’s Maxima, meanwhile, are helping break down barriers to non-bank financing for growing corporates.

Across the Baltic states, both bond issuance volumes and the number of repeat issuers have increased markedly since the mid‑2010s, reflecting growing familiarity with market‑based finance. Baltic companies issued €6.68 billion in bonds in 2025, more than doubling 2024 volumes, with local bond issuance rising 42 per cent year on the year and nearly 40 per cent of issuers accessing markets for the first time. While international issues still dominate in volume terms, the expansion of local, sub‑€20 million issues indicates growing domestic depth. 

Several factors underpinned the progress achieved. The Baltic states’ strong regulatory frameworks and political commitment to regional cooperation created an enabling environment for reform, allowing complex legislation to be adopted and implemented. Simultaneously, the EBRD’s role as a trusted adviser and its part in convening the pan-Baltic steering committee through a consistent regional approach helped to overcome coordination failures that the individual countries could not address alone, particularly in harmonising laws and sequencing reforms. 

Once the legal frameworks were in place, the Bank prioritised the strategic anchoring of first‑of‑their‑kind transactions, which have been shown to be critical in building markets, even if their effects may be uneven in the initial phases. The EBRD’s investments in the covered bond and commercial paper markets helped build investor familiarity and confidence in nascent markets without crowding out private capital. Close partnerships with finance ministries, central banks, the European Commission, market infrastructure providers and index providers were critical in translating legal reforms into operational market outcomes. 

The main lessons learned were:

• Regulatory readiness is necessary, but not sufficient: sustained impact depends on a viable issuer pipeline and a diverse investor base.
• Capital market development requires long-term horizons: early results should be interpreted cautiously.
• Future impact depends on linking instruments to financing needs: this includes, for example, SMEs and the energy transition, to ensure that improved market infrastructure translates into tangible economic outcomes.