From boom to bust: lessons from Lithuania

LTReikšminiai žodžiai: Nekilnojamasis turtas; Būstas; Būsto rinka; Būsto kainos; Bumas; Paskolos; Kreditas; Kredito rinka; Kredito pasiūla; Ekonominė krizė; Ekonominė ir finansinė konvergencija; Real estate; Housing; Housing market; Housing prices; Boom; Loans; Credit; Credit market; Credit supply; Economic crisis; Economic and financial convergence.

ENOne could hardly find an emerging European economy which, after the accession to the European Union (EU), did not experience a period of economic, financial and asset price boom followed by a sharp economic downturn and the burst of an asset price bubble recently. Yet in the three Baltic states the credit cycle and economic swings seem to have been particularly hefty, which makes this case worthwhile a close examination. Recent economic and financial developments in the Baltics serve as a clear reminder of how easy it is to succumb to the wishful thinking about sound economic convergence, nearly perfectly functioning financial and goods markets, and high resilience to macrofinancial shocks. The explosive mix of global, regional and domestic factors first ignited, then overheated and in the end derailed economic expansion of the Baltic states. At present policy makers and the private sector face a difficult challenge of preserving the macro-financial stability and putting economies back on the sustainable growth track. In this paper we provide a brief discussion of Lithuania’s experience with the recent dramatic change in external and internal economic conditions. The essay gives a brief analysis of the reasons why Lithuania is among the countries that have been hit very hard by the credit crunch. We also discuss main economic policy measures that have been taken and speculate about what steps could have been more effective. We then characterize the state of the economy in the face of falling exports, deflating asset bubble, credit crunch and contractionary fiscal policy. Finally, we reflect on some immediate macro-financial stability challenges and longer-term goals aimed at restructuring the economy and preserving competitiveness. [Extract, p. 96]