Estonia should keep close watch on Cyprus developments - cbank vice governor

Photo: SCANPIX

Estonia and Cyprus are closer than ever before and therefore Estonia should carefully watch the experiences and mistakes of the island nation, Bank of Estonia vice governor and member of the supervisory board of the Financial Supervision Authority Madis Müller says in an opinion story in Postimees.

Although the structure of the two economies is completely different and both countries' topical problems are not the same, Estonia can learn several useful lessons from keeping watch on what is happening in Cyprus, Müller says.

The situation and outlooks of the Cypriot and Estonian banking sectors and public finances do not have much in common, the banker says.

The Estonian banking sector is not overly large and the banks have sufficient capital to survive possible setbacks. Thus, Estonian depositors and taxpayers have no cause to worry.

Next to Iceland and Ireland, Cyprus is another reminder that the risks arising from the financial sector are real and they have to be strictly managed, Müller says, adding that it is in Estonia's interest to support broader development of the country's rather banking-centered financial sector.

It is worthwhile to think about export of high value added financial services but only in regard to activities where it is possible to avoid mounting up of excessive risks in Estonian banks and potential obligations for taxpayers, Müller says adding that fortunately there are no signs of such dangerous trends at present.

The aspect where Estonia and Cyprus resemble one another the most is the small size of both economies. In this context Müller recalls last year's public debate over whether it is necessary for Estonia to join the European Stability Mechanism (ESM).

An argument fielded at that time was that, due to its small size, Estonia would never be "systemic" enough for the eurozone to qualify for ESM aid when in trouble.

The fact that the eurozone has come to Cyprus' assistance proves the opposite and testifies to the usefulness of the ESM as an insurance policy, in a manner of speaking, for Estonia as well, Müller says.