TALLINN - The Estonian Finance Ministry has announced that it has begun informally looking into the possibility of taking out a loan to help ease the country's worsening economic situation (see story above).
Finance Minister Ivari Padar said that he had opened negotiations with an international financial institution on the possibility of taking out a loan. Though he refused to specify which institution the country had been in negotiations with, he did note that it was not the International Monetary Fund.
Following a Jan. 15 press conference on the topic, the Finance Minister's spokesman clarified his remarks.
"The Finance Ministry has not started formal negotiations as regards taking a loan. We have as part of our normal work had meetings with different banks and international financial institutions, at which the possibilities and terms of getting a loan have been discussed among other topics," the spokesman said.
The minister refused to add any more details, saying that the country had yet to enter official negotiations on taking out a loan.
"These have not been specifically negotiations on borrowing, which is why there is nothing more to be added on this topic," he said.
Padar said it was important to remember that possible borrowing would not mean that additional money was added to the state budget, but it would offer additional possibilities to manage cash flows. The loan will not replace the forthcoming vital cuts in the state budget, he said.
The minister underscored that it would be rational to use a loan to finance activities that are aimed toward economic development or principal, structural and political reforms.
Padar said in his remarks to reporters that the contraction in tax receipts at the end of 2008 increased the danger that the deficit in this year's budget could exceed the limit of 3 percent of GDP 's which would break the Maastricht criteria and disqualify the country from joining the eurozone until reining in the economy.
Judging by what the ministry knows at this point, the size of the gap this year might be from 5 to 6 billion kroons (320 to 380 million euros) despite cuts made in the course of the budget drafting process in late 2008, Padar said.
Information about December tax receipts raised the estimate of the size of this year's deficit by 1 billion kroons, he added.
Prime Minister Andrus Ansip told the government press conference that it would be reasonable to borrow money for specific investments, especially infrastructure projects.
Such projects are financed at favorable terms by the Nordic Investment Bank, for instance.
When asked about the interest rate of the possible loan, Ansip ruled out the possibility of a 10 percent rate. He said Estonia could raise money for a lower rate than the 5-6 percent suggested in the question. Interest rates in Europe are due to keep declining, yet the situation may change quickly, the prime minister said.
The news came just weeks after Latvia concluded an agreement with a group of international lenders, including the IMF, to take out a 7.5 billion euro loan. Estonia was one of the countries that pledged to help its ailing neighbor.
