Will the euro-crisis hit home for Estonia?

TARTU - Not a week goes by without more news about the difficulties many eurozone countries are facing, Greece in particular, due to excessive debt levels and the market’s wariness over the sustainability of it all. Countries that are not on the verge of defaulting on their debts have nothing left to do but to help other eurozone countries in order to save the collective whole. As the newest euro-member, Estonia is offering a helping hand as well, quoting solidarity with others as key. Estonia is participating in the second Greek bailout, and its own economy appears strong.

On Thursday, July 21, the leaders of the 17 euro-countries agreed on a package deal to cover completely the financing of the second Greek bailout in order to ensure the survival of the euro and the stability of the eurozone. Estonia was represented at the meeting by President Toomas Hendrik Ilves. In a statement, he said “The public sector will contribute around 109 billion euros, in addition to a substantial contribution by the private sector.” The public sector financing is planned to be channeled through the European Financial Stability Fund (EFSF), which was created for crisis situations. If Estonia were to join the EFSF, then the guaranteed contribution from Estonia for loans given out by the EFSF would be 0.28 percent of GDP.
The president stated after the high-level meeting in Brussels that “Tonight we made an important step towards strengthening the whole of Europe and our common currency. Hopefully the markets will calm down and the widening of the Greek, Irish and Portuguese crises to the whole of the eurozone will stop.”

Hence, Estonia at this moment does not have to transfer funds anywhere, yet. The country has committed itself to supply the guaranteed amount of 0.28 percent when called upon. President Ilves commented on this by saying it “is all part of the internal solidarity within the eurozone and collective helping.” Estonia has now been a member of the eurozone for nearly 8 months and has managed to remain a poster child for intelligent finance. At the meeting, it was reiterated that all euro countries have an obligation to have a budget deficit of under 3 percent by 2013, an aim only fulfilled by three countries at the moment – Estonia, Luxembourg and Finland. The Swedish deficit is under 3 percent as well, but obviously it is not part of the eurozone. The president commented that only through responsible finances can the eurozone remain strong.

Although the Estonian contribution is small compared to many other euro nations, compared to GDP it is substantial. However, the Ministry of Finance is yet to announce the exact sum that is expected from Estonia. Therefore, hopes are running high for this bailout to be the last. Amid growing fears about the success-rate of the Greek bailout and the problems widening to Italy, there is still quite a bit of uncertainty. Yet after the announcement last Thursday of an agreed bailout, the markets saw a rise of confidence in the euro. This was, however, short-lived due to an announcement by Moody’s.

On Monday evening the international credit rating agency Moody’s lowered the credit rating of Greece by three levels, leaving it just one away from the level that points to bankruptcy. In a statement, Moody’s said that “The combination of the announced EU support program and debt exchange proposals by major financial institutions implies that private creditors will incur substantial economic losses on their holdings of government debt. The rating’s developing outlook reflects the current uncertainty about the exact market value of the securities creditors will receive in the exchange.”

As a sign of the international mistrust of Greek finances, the confidence within the European Union was shaken. Moody’s delivered a blow to any optimists about Greek finances, stating that “the announced EU program, along with the Institute of International Finance’s (IIF) statement (representing major financial institutions) implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 percent.” This urged other eurozone leaders to start re-thinking its bailout terms and about any additional measures that would have to be taken.

In addition to having a healthy budget and sound public finances, the Estonian economy does not seem to be hard-hit by the current euro-crisis. In a recent European-wide stress test for banks, 98 percent of the Estonian banking sector was checked and no problems emerged. What is more, none of the Estonian financial reserve has been placed in Greek bonds, and these bonds are not popular among the pension funds of private banks. The Bank of Estonia commented that among its investment portfolio, there cannot be any bonds with a rating of lower than BBB-.

The press officer, Viljar Raask, commented to Delfi that the lower the rating, the lower the amount of those bonds in the portfolio. Therefore, Estonian public finances are continuing a conservative and intelligent financial policy which follows the risk-free behavior model Estonia has demonstrated in recent years.
The Bank of Estonia commented that the government’s aim to achieve a budget surplus by 2013 is attainable. According to the main scenario of the Bank, the aim is reasonable and easily attainable if costs can be kept down. Therefore, Estonia is not likely to be hit hard by the troubles many Southern European euro-nations are facing. According to the British publication The Economist, “should the single currency crumble, [Estonia is] determined to be on the inside track for any new German-centered ‘super-euro.’”

Estonia’s credit ratings are very high, especially compared to the region. On July 1, Fitch raised the Estonian credit rating to A+, the fifth-highest investment grade, with a stable outlook. According to Bloomberg, the rating is the second-highest in Eastern Europe, behind Slovenia at AA and on a par with the Czech Republic and Slovakia. Fitch commented on the rating: “The upgrade reflects Estonia’s solid economic growth performance, exceptionally strong public finances, declining external debt ratios and signs of increasing stabilization in the banking sector.” Estonia has high credit ratings from other credit rating organizations as well.

As Estonia is leaving behind the problems of the global financial downturn, the eurozone is in its worst crisis yet. As international financial organizations and observers agree that Estonia’s economy is healthy and viable, the country is now in a position to help out countries with less than fortunate public policies.