TALLINN - The government of Estonia announced that it would take out a 6.5 billion kroon (415 million euro) loan from two European banks.
Prime Minister Andrus Ansip said the money would help the country tackle its deficit in an effort to bring the economy in line with the Maastricht criteria and allow it to join the eurozone sometime in 2011.
"We are planning to bring down the budget deficit to 3 percent [of GDP]. This lending arrangement is one of the sources to cover the deficit," the prime minister told journalists on April 30.
The government said in a statement it planned to borrow 2.35 billion kroons from Swedbank, the country's largest lender, with a maturity up to two years and 4.15 billion from the European Investment Bank (EIB) with a maturity up to 15 years.
The EIB loan is part of a larger 8.6 billion kroon loan that the country requested earlier. The money will be used in the co-financing of structural and road construction projects running through 2013, the Dow Jones news wire reported.
The government said funds from the EIB will be used for co-financing European Union structural fund projects and construction of roads.
Finance Minister Ivari Padar said the Swedbank loan was offered at Euribor plus 2.75 percent. The Ministry of Finance said it expects to receive the loan sometime later this month.
The government has also said it is planning on drawing some 3.5 billion kroons of budget reserves to help cover the deficit. The country had a total of 7.33 billion kroons in reserves at the end of March. Using the money will require approval from parliament.
"The use of reserves' resources is quickly needed as the conditions of the economic fall have lowered budgetary revenue and increased expenditure," the Finance Ministry said in a statement.
Estonia has low government debt and has followed a conservative policy in borrowing since the fall of the former Soviet Union in 1991. Most of its loans have come from multilateral lenders.
Swedbank faces mounting loan losses in the Baltic region, where it has around 17 percent of total lending.
The announcement of the loan came on the heels of a revised central bank forecast in which it predicts the economy to fall by more than 12 percent this year.
The revised forecast predicted that the Estonian economy would drop by 12.3 percent 's up from estimates at the beginning of the year that the fall would be just 5.5 percent.
"According to Eesti Pank's spring forecast, this year's economic downturn in Estonia will be around 12 per cent. The majority of economic experts do not expect growth in the world (and also in Estonia) to resume before 2010," said an economic policy statement released by the bank.
The bank also released a worst case scenario of a 15.3 percent decline and an optimistic scenario of 8.5 percent.
The central bank stressed the adoption of the euro should remain a priority for policymakers.
"The objective of adopting the euro needs to be borne in mind when planning any economic policy measures. A postponement of the euro objective would make the return to a sustainable convergence path more challenging in the current global financial crisis situation," the central bank said.
In order to keep its budget deficit below the 3 per cent of GDP limit demanded by the Maastricht criteria for eurozone entry, the government will need to find an extra 8.5 billion kroons for the state budget, the bank predicted.
The Bank of Estonia explains the new, much more negative outlook with the fact that the economic outlook of Estonia's main trade partners have also been adjusted downwards.