TALLINN - Estonia’s chances of a credit rating upgrade have been boosted by the European Commission’s decision on May 12 to recommend euro accession for the Baltic nation, said Moody’s Investors Service and Fitch Ratings, reports Bloomberg. “It is extremely likely that Estonia will adopt the euro on Jan. 1,” Fitch Head of Emerging Europe Ed Parker said in an e-mail. “Fitch would expect to upgrade the ratings following a decision by the Council of European Union Finance Ministers, scheduled for July 13.”
Moody’s Senior Credit analyst Kenneth Orchard said “joining the eurozone will be positive for the government’s creditworthiness, as it will effectively eliminate balance of payments and currency risk, and severely reduce contagion risk,” in an e-mail. The Baltic state pushed through budget cuts equivalent to 9 percent of GDP last year to bring this year’s shortfall to 2.4 percent of economic output on a debt-to-GDP ratio of 9.6 percent. That means Estonia will outperform all existing euro members on the European Union’s fiscal rules, making it a “model” for the bloc, according to Barclays Capital Chief Economist for emerging market currencies Christian Keller.
Moody’s rates Estonia’s long-term foreign-currency debt A1, and raised the outlook to stable on March 31. That’s lower than all existing euro members, save Malta, which has the same rating as Estonia, and Greece, which is ranked two levels lower at A3.
Fitch rates Estonia BBB+, and put the country on ratings watch positive on March 30.
While Estonia doesn’t have any outstanding government bonds, investors still trade credit default swaps on the country. CDS contracts on five-year debt dropped as much as 12 basis points on the news to 98, the lowest in more than a week, according to CMA DataVision. CDS show investors would be more at ease holding Estonian debt than bonds issued by founding euro members Greece, Italy, Spain, Portugal and Ireland.
“Although this was to a large extent priced in, the decision is likely to yield a further improvement in Estonia’s risk perception,” Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul, said in an e-mail.
Even so, the debt crisis raging in Greece, which is showing signs of spreading to Spain and Portugal, serves as a warning about failure to adhere to the EU’s fiscal criteria after accession. “As Greece has amply demonstrated, euro adoption does not eliminate the need for strong fiscal policies and ongoing structural reforms to support competitiveness,” Orchard said. “Moody’s future rating actions are likely to be focused on these criteria.”
The 1992 Maastricht Treaty requires EU members to keep their budgets within 3 percent of GDP, debt below 60 percent of GDP and inflation within 1.5 percentage points of the three members with the lowest rates.