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 a lack of depth in local corporate bond markets means these countries have faced difficulties in absorbing larger transactions.

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

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 (EC) 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 EC. Working jointly, they have reviewed laws across the region and aligned national frameworks with EU standards. This led to the adoption of a 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 making more than €2.4 billion of bond issuances with EBRD participation in 2025 alone, marking a significant boost in their access to nonbank sources of financing.

Access to nonbank financing has also been advanced through EBRD support for corporate debt issuances, 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. Successes have included four transactions with Lithuanian retailer Maxima Grupė, including a €40 million debut bond issuance that was the biggest ever bond issuance on the local market by a private-sector company from the Baltic states at the time. 

Estonian Luminor Bank also made its first covered bond issuance, with EBRD participation, as the Bank followed up its support for new legislation by helping demonstrate the new product’s viability. The pan-Baltic covered bonds issued by Luminor Bank feature assets from all three countries in their cover pool and were listed on the Irish stock exchange and saw strong take up by private investors, illustrating confidence in the product. The EBRD was the sole international financial institution involved.

Attracting international investors

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

The Bank has also helped 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 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, signaling early market acceptance and paving the way for future covered bond issues by LHV Bank and Coop Pank. Repeat bond and commercial paper issuances by Lithuania’s Maxima are helping break down barriers to nonbank financing for growing corporates.

Across the Baltic states, 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 year and nearly 40 per cent of issuers accessing markets for the first time. While international issues still dominate volumes, the expansion of local, sub‑€20 million issuances indicates growing depth at the domestic level.

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 helped 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 strategic anchoring of first of their kind transactions. The EBRD’s investments in covered bonds 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 EC, 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 examples, SMEs and the energy transition, to ensure that improved market infrastructure translates into tangible economic outcomes.