' assets and liabilities. faster gdp growth allows one to expect faster accumulation of assets and, therefore, faster improvement in the ability to service loans. however, estimating potential output growth is tricky. such estimations are roughly based on the average of the past few years'performance. today we think that potential output growth may be around 7 percent in estonia. let me remind you that a few years ago we thought it was 4 to 5 percent. upward revisions are not the problem, of course, but there are also several examples of downward revisions : portugal, greece... even poland. while credit growth has given a significant contribution to output growth, it is hardly sufficient in the long run. too high indebtedness will limit output growth potential, as loan - servicing costs will eventually curb consumption and investment. the effects of economic slowdown or recession on loan quality may be quite different over the business cycles, however. all things considered, estonian borrowers weathered the effects of the russian crisis of 1998 relatively easily. however, one has to keep in mind two things. firstly, the household credit to gdp ratio was at around 10 percent. now it is around 30 percent. secondly, the households'loan servicing ability did not deteriorate dangerously, as low - income households who suffered the most in that recession had not had access to credit. in the current cycle there are more households with an access to credit, also from the lower income deciles, indicating the spread of the effects of the potential slowdown to a wider part of the economy. the second risk factor i would like to point out is the price level of real estate. real estate prices have recently surged globally, and also in the baltic countries. the possible factors behind this increase include rapid and relatively widespread income growth, favorable borrowing conditions, and international demand. however, despite these surges, absolute levels of real estate prices remain still about two times lower in tallinn than in helsinki, in line with the difference of overall price levels. there are signs that prices are now stabilized in nominal terms and may have slightly decreased in real terms. nevertheless, relative prices of real estate have increased dramatically. whereas the ratio of price of a square meter to monthly wages is about one in helsinki, it exceeds two in tallinn. the expectations of real estate price convergence fuel credit demand in baltic countries but imply ever - increasing risks to both borrowers and lenders. ( it is fair to say, though, that the majority of real estate

an additional boost to investments. the above factors, including convergence, as a background, one may speculate about the length of the current economic cycle, and where exactly we stand in that cycle at the moment. in short, there are some suggestions that we might have entered unusually long economic cycle and may be coming closer to the peak of the cycle. however, many of the current vulnerabilities of the baltic economies are also tied in with these effects of the eu accession and rapid convergence. understanding these risks requires careful analysis. let me now turn to my second topic - challenges the strong economic and credit growth are offering. perceived risks to financial stability : credit growth and real estate markets the acceleration of credit growth is a prominent but natural part of the picture of robust economic growth and general optimism in the region. improved access to credit in the baltic countries has led to higher investments ( much needed in rapidly developing economies ) and helped to smooth consumption over time. for example, in estonia the overall increase in bank credit and leasing accelerated to around 60 percent in mid - 2006. this has by far exceeded the growth rates seen in the nordic countries. on the other hand, the accompanying rise in indebtedness and current account deficits has given cause for concern to both domestic and international evaluators. it is always worthwhile to put things in perspective. during the past five years, the growth in household indebtedness in terms of gdp has been fast in several " old " eu member states, including denmark in fact, even faster than that in the baltic countries. at the same time it cannot be forgotten that the level of household savings ( especially long - term savings ) in estonia and other baltic countries is still low when compared to that in the nordic countries. therefore, households face a non - negligible risk to their balance sheets, as their financial assets are still rather low in international comparison. it is the lenders - banks and leasing companies that need to take these risks into account. of all the factors of credit growth i would point out two. firstly, there are longer maturities of real estate loans. longer maturities have smoothed the growth of borrowers'debt burden in terms of monthly payments of a mortgage. of course, looking at total loan servicing costs, the overall debt burden has increased. when we compare estonia and other baltic countries with more developed economies, there is obviously room for further credit growth : total bank credit as a percentage of gdp in 2004 was over 100