OREANDA-NEWS. On November 19, 2008 in Vilnius, the session of general meeting has taken place in the Lithuanian Academy of Sciences. Subject of the session: “Financial crises and their lessons to Lithuania”, reported the press-centre of Bank of Lithuania.

Chairman of the Board of the Bank of Lithuania Reinoldijus Sarkinas presented a report on the subject. He briefly surveyed the reasons of the global financial crisis and its impact upon Lithuania as well as the lessons we have to learn for the future.

According to Reinoldijus Sarkinas, direct impact of the global financial crisis on the financial system of Lithuania and its economy is rather limited due to a number of reasons. One of them is that the banking system of the country is based on the traditional model of banking and is oriented towards serving the domestic needs for crediting. Moreover, our financial market is relatively small therefore development of complex financial products as well as trading in those products would be expensive and inexpedient.

As Reinoldijus Sarkinas indicated, indirect impact of the turmoil in global financial system upon the economy of Lithuania is more perceptible. He noticed that along with the rise of interest rates on loans in interbank markets, interest rates on loans increased in Lithuania too. Moreover, credit institutions of the country tightened requirements for the borrower risk assessment. The above reasons determined lower ability of enterprises and households to borrow. However, slower growth rate of loans is related not just to changes in supply but also to the reduced demand for credit.

The Chairman of the Board of the Bank of Lithuania emphasised that the financial institutions of the country hold enough funds for lending, however - as could be seen from the regular banking surveys conducted by the Bank of Lithuania - demand for loans has declined due to reduced likelihood of profitable investment.

Reinoldijus Sarkinas pointed out that the indirect impact of shocks in global financial markets on the domestic economy is related to lower foreign demand for Lithuanian goods owing to slower economic growth in foreign countries.

When speaking about the lessons learned by Lithuania from the global financial crisis, Reinoldijus Sarkinas emphasised that adequate assessment of customer risk by credit institutions was of utmost importance. The Chairman of the Board of the Bank of Lithuania said: “We can be satisfied with the fact that our banks were basically conservative, strove to apply advanced approaches to risk assessment and did not seek for quick profit at the expense of investors”.

In Chairman’s opinion, it is very likely that the present situation, when prices in the real estate market got stable and are decreasing in some segments of the market, will influence decisions of both enterprises and individuals concerning investment in the future. With the perception that prices can also fall and not just rise all the time, investments will be made more cautiously.

Reinoldijus Sarkinas said that, in order to maintain steady state of financial markets and calmness of the residents, as well as to reduce consequences of the slowdown in economic growth, the roles of both central banks and other institutions are equally important. Here in Lithuania, we are following the same road. In October 2008, the Seimas strengthened protection of deposits held with the banks.

At the beginning of November, the Government adopted the resolution establishing that - taking account of the current tensions in the global financial markets and the necessity to introduce measures to strengthen the stability of the financial market in Lithuania and avoid negative consequences for the economy - temporary measures of liquidity support and investment into bank capital may be taken. In Order to implement the above measures draft legal acts will be prepared.

Reinoldijus Sarkinas warned not to confuse the impact of global financial crisis on Lithuania and the consequences of normal slowdown in the growth of domestic economy.

Reinoldijus Sarkinas said: “In case global financial turmoil had not occurred, growth of the Lithuanian economy would have been slowing down anyway, although recent events in the world have made that slowdown more pronounced. Not so long ago, internal real estate market boom has expired, moreover, energetic shocks in our economy will be relatively deeper as the gas prices rose several times over a few years and electricity prices will rise after the closure of Ignalina Nuclear Plant".

The Chairman of the Bank of Lithuania answered questions of the participants of the general session of the Lithuanian Academy of Sciences.