Estonia will probably join euro in 2011, Moody's says
LETA-BLOOMBERG-ELTA
Estonia, which is planning to become the next country to join the European common currency, will probably be able to adopt the euro in just over a year, Moody's Investors Service said.
"There is a strong likelihood that Estonia will adopt the euro in January 2011, effectively eliminating currency and balance of payments risk," Moody's credit research forecast said late yesterday in an e-mailed report.
Estonia has sacrificed economic growth to live up to euro adoption goals. The country which is enduring the third-worst recession in the European Union after Lithuania and Latvia, has cut its budget deficit by nine percent of gross domestic product this year to meet adoption terms. Prime Minister Andrus Ansip expects the move to boost investor confidence and trade.
The government's main task will be to show the 2010 budget deficit will remain within the EU threshold of three percent of gross domestic product, Moody's said. The European Commission this week forecast the deficit will rise to 3.2 percent of GDP next year from three percent in 2009.
The International Monetary Fund on October 26 said 2011 euro adoption appeared to be within Estonia's reach, urging it to cut next year's deficit by one percent of GDP and aim for a longer- term fiscal balance.
Even so, pushing for a currency switch in 2011 may prove costly, according to Fitch Ratings.
"Although euro adoption is possible for Estonia in 2011, Fitch thinks 2012 is a more likely scenario," Edward Parker, the rating service head of Emerging Europe Sovereigns, said in an e-mailed reply to questions.
"Joining the euro in 2011 would require Estonia to implement further huge spending cuts in the face of the severe recession to reduce its reported budget deficit below three percent," he added.
Anything outside the three percent budget deficit rule would require "a generous interpretation by the EU authorities regarding its definition of the budget and the sustainability of its fiscal and inflation performance," Parker said.
The economy may start growing again in "early" 2010, Moody's said, though "it could be several years before the economy returns to a more robust condition" as domestic demand and exports remain weak due to public spending cuts and sluggish growth in the major European economies, it said.
Moody's, which rates Estonian government debt at A1, the fifth highest investment grade, in April lowered Estonia's credit outlook to negative, due to a high degree of uncertainty for the Estonian and regional economic outlook, the possibility that eurozone entry might be delayed, and the risk of contagion from Latvia.
2009-11-04
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