Moody_s-Swedish investment helps Estonian banks.

``The acquisition of controlling stakes in 1998- Swedbank in Hansabank and SEB in Eesti \hispank - significantly improves the credit rating outlook of the sector' says Moody_s Investors Service in a report published on the latest developments in the Estonian Banking System. Indeed, Moody_s recently upgraded Hansabank to Baa2/P-3 as a direct result of the investment. Also, Eesti \hispank_s current Baa3/P-3 rating also incorporates an element of external support. Greater liquidity and capital backing, more shareholder support in the event of a crisis, management expertise, improved corporate governance, and more advanced credit practices will together have an overall strongly positive impact on the sector which is dominated by the two largest banks. These two between them account for over 80% of the country_s banking assets and liabilities. However, George Paschalis, author of Moody_s report, cautions against too optimistic an outlook by detailing a number of areas that remain a concern. Negative growth in Estonia in the aftermath of the Russian crisis -- although there are signs that the economy is recovering -means that asset quality remains an issue. Secondly, the domestic interbank market remains thin, leading to volatility in interbank rates. Also, Estonian banks maintain a long position in the Euro as a safe hedge against currency devaluation at home. However, this position might have to be unwound if there were a speculative attack against the local currency. The combination of the above factors means that bank earnings could remain volatile going forward, despite the fact that competition has eased, following the consolidation of the sector. The difficult economic conditions that could still haunt Estonia reflect its small and open economy, a low domestic savings capacity and proximity to other volatile emerging economies.