Published: 05.11.2020

Diversification of sources of finance helps local corporates in the current climate.

  • Introduction of new capital market instrument in the Baltic states
  • Short-term instrument to address liquidity and working capital needs
  • Alternative sources of finance in line with ECB recommendation

The European Bank for Reconstruction and Development (EBRD) and the central banks of Estonia (Eesti Pank), Latvia (Latvijas Banka) and Lithuania (Lietuvos Bankas) are joining forces to develop a regional market for commercial papers.

Commercial papers (CPs) are short-term unsecured promissory notes issued by companies with a fixed-term maturity and used to address short-term liquidity or working capital needs. Demands for such alternative sources of finance are rapidly increasing in the current coronavirus pandemic.

In a Memorandum of Understanding, signed today, the four parties resolve to cooperate in developing a deeper and more efficient regional CP market in line with the best practices outlined in the “Short-Term European Paper” by the European Central Bank (ECB). It states that the papers must be freely transferable and capable of being traded over-the-counter.

The requirement for free transferability aims to align with the collateral eligibility requirement by the ECB for financial instruments by being admitted to trading on acceptable trading venues, which are regulated markets in the European Union (EU); or a non-regulated market accepted by the Eurosystem, the monetary authority of the eurozone.

Promoting the regional CP market will contribute to diversifying sources of finance for local corporates, supporting the development of tradeable securities and improving the regional debt capital market and mobilising funds from institutional investors.

The Baltic CP initiative complements existing regional projects implemented by the EBRD in close partnership with the local authorities and the European Commission to increase the supply of investable capital market instruments. The initiative is in line with the European Commission’s action plan for the creation of a Capital Markets Union.

Estonia’s Central Bank Governor Madis Müller said: “The EBRD’s continued support to further developing the Baltic capital markets is much appreciated. There have been many success stories for the EBRD in the three Baltic markets and I expect this to be another one. Broadening the menu of financing options to corporates is especially helpful during the current challenging economic climate.”

Latvia’s Central Bank Governor Mārtiņš Kazāks said: “Developing a commercial paper programme aims to deliver multiple benefits to the Baltic states economies, including deepening of our capital markets, diversifying the sources of corporate financing and expanding the investment opportunities for investors. Once again the Baltic states and the EBRD are joining forces and given our long-standing cooperation we expect another successful outcome with this endeavour.”

Lithuania’s Central Bank Chairman of the Board Vitas Vasiliauskas said: "“It is good timing to work on the development of the commercial paper market as the expansionary Eurosystem monetary policy facilitates favourable market conditions for debt issuance. A better developed financial market should positively contribute to a smoother transmission of monetary policy to the real economy. In the future, the diversification of sources of financing would also increase the resilience of Baltic corporates in stressful times as well as contribute to more favourable borrowing conditions in normal times.”

EBRD Vice President Alain Pilloux said: “The pan-Baltic CP market can create a viable alternative for financing when needed the most. The proposal aims to address the short-term corporate financing needs at a regional level by mobilising investment funds in line with the EU Capital Markets Union initiative. This product’s development would have not been possible without the extensive support of our long-term partners, namely the central banks in the Baltic states.”

The EBRD has been actively involved in the development of capital markets in the three Baltic states and, in 2018 together with the European Commission, sponsored the signing of a Memorandum of Understanding between Estonia, Latvia and Lithuania to create a pan-Baltic capital market to strengthen their economies and stimulate investment to create jobs.

The EBRD has been investing in the Baltic states since 1991. To date, the Bank’s total investment there stands at more than €2.5 billion through more than 280 projects.

EBRD press release