of public finances. in the case of latvia, this is taking place within the framework of a financial support programme led by the international monetary fund ( imf ) and the eu. the previous imbalances have now declined in all of the three countries. the current account is, for example, now showing a surplus following years of deficits in all the three countries. this is mainly because there has been a very substantial fall in imports. inflation has also declined, and in estonia prices are now falling on an annual basis. however, these developments have also taken place at the expense of increased unemployment and impaired credit quality. this is reflected not least in the fact that late payments have increased dramatically. although there are signs that the downturn is slowing down, the development of the baltic states in the period ahead is still associated with several risks. the main challenge relates to government finances where the budget deficits have grown as economic activity has weakened. the possibility to issue government securities to cover these deficits is, however, limited and latvia is almost entirely dependent on the international support programme. here there is also a great need for reforms in the public sector, reforms that should have been carried out during the period of positive growth. estonia is in a better initial position as during the good years of the decade the country took the chance to build up fiscal policy reserves that can now be used as an extra buffer to fund the budget deficit. falling prices on the baltic property market in terms of financial stability, the development of the baltic property market is of course a cause for concern. this development is in many ways reminiscent of the swedish property crisis. exaggerated expectations of future price increases pushed up prices, particularly housing prices. now the prices of both commercial properties and housing have fallen dramatically. for example, the average price of an apartment in tallinn was more than 50 lower in june 2009 compared to the peak in april 2007. this means that prices will soon be back at the level of 2004 ( see figure 10 ). in latvia, the average price of apartments fell in the same period by almost 60 per cent, which is among the largest price falls noted in europe during this crisis. 6 in lithuania, the fall in prices has been comparatively moderate : 28 per cent during the second quarter of this year compared to 2008. 7 we could say that after being a landlord's market for several years, the property market is now a tenant's market. in an economic downturn, it is common for landlords to offer

cent this year. world trade is expected to fall by over 12 per cent. 4 gdp is expected to fall in our region too – by 5 per cent in sweden, which is slightly more than the figure for our nordic neighbours. development in germany is somewhat weaker than in sweden, while zero growth is expected in poland. the situation is much worse in the baltic states ( see figures 2 and 3 ), where gdp is currently expected to fall between 15 and 20 per cent this year. 5 this means that the crisis in the baltic states is unparalleled compared with previous crises. the labour market has also weakened dramatically throughout the region. this is evident not least in the baltic states where unemployment has now reached almost 17 per cent. only a year ago, the level of unemployment was approximately 5 per cent ( see figure 4 ). for several years, development in the baltic states could be described as a fantastic success story with high economic growth. in the period 2005 to 2007, for example, economic growth in estonia and latvia was approximately 10 per cent per year, while development in lithuania was more moderate. at the same time, however, major domestic imbalances developed which laid the foundations for the crisis we are witnessing today. when the baltic states moved from being regulated economies to market economies, optimism about the future was high and both household consumption and private sector investment increased dramatically. however, the investments went to the service and property sectors instead of to developing production capacity in the industrial sector. export development was thus weak while imports increased rapidly as a result of strong domestic demand. consequently, the current account deficits of the baltic states increased ( see figure 4 ). the deficits were largely funded by taking loans in euro, mainly from swedish and other foreign banks. the high level of economic growth led to the overheating of the labour market and wages and inflation increased ( see figure 6 ). in latvia, for example, nominal wages in swedbank's market shares in the second quarter of thiss year amounted to 43 per cent in estonia, 25 per cent in latvia and 22 per cent in lithuania. seb's market shares in the same period amounted to 24 per cent in estonia and 15 and 29 per cent in latvia and lithuania respectively. imf ( 2009 ) world economic outlook, june. eastern european consensus forecast ( 2009 ), august. the public sector increased by more than 35 per cent in the year prior to the outbreak of the crisis, and in the private sector