Estonia closing in on euro

TALLINN - The Estonian government’s budget deficit estimate for 2009 was confirmed by the statistics office on March 26, delivering numbers that show the country has met its terms for euro entry in January 2011, writes Bloomberg. The general government deficit, including local governments and social insurance funds, was 3.7 billion kroons (237.1 million euros), or 1.7 percent of GDP, in line with the Finance Ministry’s estimate this month and below the 3 percent limit for euro adoption.
The official report is the last piece of evidence on whether Estonia qualifies for the euro. The Finance Ministers of the 27-member European Union will now most likely approve Estonia’s entry bid on July 6, following a positive recommendation by the European Commission and the European Central Bank in May, says Nordea analyst Annika Lindblad.

“The release further boosts expectations of Estonia being able to join the euro area in January 2011,” Lindblad said. “The European Commission could well have reservations to some of the budget items. However, Estonia’s budgetary position is, anyhow, good and the debt level is low, and we do not believe that these reservations will lead to the deficit exceeding the 3 percent limit.”

Estonia doesn’t have any government bonds, though a market for credit default swaps on its debt exists as an instrument for estimating the country’s credit quality. The cost of insuring against a default was at 94.1 basis points (0.941 percent) on March 26 in London trading, reports CMA DataVision, up slightly from 93.8 basis points at the previous day’s close. The credit- default swaps have been the fourth-best performer globally this year.

Estonia is moving closer to the euro, said European Commission President Jose Barroso on March 24. “Estonia is on track and moving in the right direction,” he said at a press conference in Brussels.
Rebounding from last year’s 14.1 percent slump in economic output, Estonia says it will remain within the required debt limits in 2010, reports Businessweek. Barroso’s backing for Estonia signaled that the European Union is pushing ahead with the expansion of the 16-nation eurozone to Eastern Europe, even as the Greek fiscal crisis raises questions about the currency’s solidity.

“Estonia will be judged on the basis of its own performance,” Barroso said. “Recent developments in other euro-area member states will not influence the commission’s assessment.” Estonia is aiming for a 2.2 percent deficit in 2010. The commission warned on March 17 that possible revenue shortfalls put that target in jeopardy.
The general government gross debt level increased in 2009. By the end of the year, the debt totaled 15.5 billion kroons, growing by a third compared to 2008. The central government’s debt level nearly doubled in 2009, compared to 2008, reaching 44 percent of the general government sector’s total debt. Total borrowing by local governments increased by 600 million kroons in 2009, totaling 8.7 billion kroons, show Eurostat data.

In the 4th quarter 2009, domestic debt decreased by 0.7 billion kroons, and the level of the general government’s foreign debt grew by 2.5 billion kroons. Both the decrease of the domestic debt and the increase of the foreign debt were mainly the result of the activities of the central government, as the debt level of the local governments remained almost unchanged in the 4th quarter.

Total general government expenditures for the 4th quarter decreased by 17.5 percent. Expenditures decreased in all cost categories, only the expenses for social benefits increased, by 0.5 billion kroons (6.2 percent). The general government’s wage costs were 1.2 billion kroons smaller.

Total income increased by 4.2 billion kroons (16.9 percent). Taxes on products and property income raised the total income.
The 10 former communist nations that joined the EU since 2004 are required to adopt the euro once they meet conditions that include capping inflation, the deficit and debt. Estonia would be the third to join the eurozone after Slovenia and Slovakia.
Prime Minister Andrus Ansip, in cutting the deficit by 9 percent of GDP last year to meet the budget terms, said that this would help the economy exit its worst recession since independence in 1991, more than any fiscal stimulus measures would.
“Euro entry next year is virtually a done deal - it won’t solve Estonia’s structural problems, but it would be a remarkable achievement nonetheless,” said Neil Shearing, senior emerging-markets economist at London-based research company Capital Economics.