Tag Archives: Andres Lipstok

Welcome To The Euro, Estonia! Here's Your 4,5% Extra Risk Premium

As some might have noticed, the euro zone – also known as EZ16 – has now become EZ17. It happened last week, as Estonia officially joined the European disaster zone. And the financial markets gave their official approval this week by kicking the price on Estonian CDS’ up by 4,45%. The Baltic Euro newbee moves straight in among the Top 8 countries with the highest risk of default.

“Joining the euro is a status issue for countries seeking to cement their position at Europe’s top table.”

Simon Tilford

The funniest thing is that the first, and almost the only, newspaper outside the Baltic region  reporting the historical event was The New York Times; on Thursday June 17th the representatives of the 27 European countries hailed the sound economic and financial policies that had been achieved by Estonia in recent years, and signed the paper that authorize Estonia to shift from the kroon to the euro on January 1th 2011.

For the leaders of the bloc, expanding the euro zone to 17 nations is tantamount to a show of confidence at an inauspicious time for the battered euro, which has lost about 13 percent of its value against the dollar since the beginning of the year, James Kanter writes in the NYT,

With a debt crisis that appears to be spreading from Greece to Spain, membership for the country, Estonia, might seem more like a curse than a blessing.

There has been speculations about the countries might change its mind and abandon the single currency, and some have doubts that Estonia is even ready for the move.

“Maintaining low inflation rates in Estonia will be very challenging,” the European Central Bank warned last month.

Still, the euro remains among the strongest currencies in the world, and membership opens the door to a club with global influence.

For small and unsure countries on the fringes of the European Union, it doesn’t get much better than this – no matter the mounting downsides for countries already on the inside.

Political Prestige

Estonia becomes the third ex-Communist state to make the switch to the euro, after Slovenia and Slovakia, and the first former Soviet republic to do so.

Membership is also an important signpost that a country is on the way to achieving Western European standards of living, an important goal for a former Soviet republic like Estonia that has long been eager to develop.

“It’s a great day for Estonia,” Andrus Ansip, the Estonian prime minister, told Latvian state radio in an interview.

“We prefer to be inside, to join the club, to be among decision makers.”

And Estonia’s central bank governor, Andres Lipstok, will now be able to take a seat on the European Central Bank’s powerful council that sets interest rates.

Sheer Bloody-Mindedness

“Joining the euro is a status issue for countries seeking to cement their position at Europe’s top table,” says Simon Tilford, chief economist for the Center for European Reform, a research organization based in London.

“But you also could call it sheer bloody-mindedness of Estonia to join now with the outlook for the currency so uncertain,” Tilford says according to NYT.

With a total output of about $17 billion, the Estonian economy is tiny.

It’s placed as the sixth poorest country among the (now) 28 EU nations.

Public debt in Estonia is currently estimated at an annual 7.2% of GDP -  a tiny deficit compared to most other countries in the bloc.

And right now it looks like the Estonian government will be able to keep its pledge to the euro.

But note; it looks like it.

According To Schedule

Just two days before the deal was to be sign in Brussels, the Estonian Ministry of Finance published it’s budget figures for the first five months of 2010.

The Ministry of Finance estimated that the Government sector budget deficit by the end of April was 5.1 billion kroons,  or 2.39% of the projected GDP of the year 2010, theBalticCource.com reports, quoting LETA/Postimees Online.

In five months of 2010 the State budget collected 32.5 billion kroons in revenue while the expenses amounted to 34.6 billion kroons.

The biggest State budget spending in five months are mainly social benefits – 15.3 billion kroons.

2.4 billion kroons were spent on investments. The payments on investments in the first few months of the year were by 10% higher than in the past couple of years due to improvements in the use of foreign aid.

Estonia’s operating expenses in total as well as the human resources spending have fallen, the Ministry of Finance says. And the State’s benefits paid to individuals, the private sector and to other Government authorities are on the same level as last year.

Now – compare that with the projections charted below:

The Estonian unemployment rate has increased by more than 150% between September 30th 2009 and February 19th 2010, to 14,3%, according to Index Mundi.

In addition, the Estonian credit agency, Krediidiinfo, estimates that the number of companies that will go bankrupt this year could amount to 1,700, especially in the construction business, accommodation business and catering business.

That’s up by 700, compared with the 1000 bankruptcies in 2009.

Just to put the topping on the cake; Estonian overdue loans rose in May to the highest level since at least 2008 as troubles in the commercial property industry outweighed improvements in mortgage asset quality, Bloomberg reports.

The share of loans overdue for more than 60 days rose to 7 percent of total credit issued to companies and individuals, compared with 6.7 percent in April, central bank says, according to the balticbusinessnews.com.

According To Schedule?

In For A Shock?

For the first time in many years, the average wages in Estonia fell (about 5%) in 2009.

Kalev Petti, head of research at Faktum & Ariko, says that othewise optimistic Estonians may become more pessimistic in January 2011 when Estonia adopts the euro.

“When the euro arrives, people and especially older population, will understand how poor they are.”

Petti says that while there were few other factors that are increasing pessimism among the older generation, it must be their feeling about the upcoming euro adoption and fear of prices continuing to rise. Pensioners are uneasy about the euro and the actual transition may cause psychological depression for many, the balticbusinessnews.com writes.

I guess the following statement made by Estonia’s prime minister, Andrus Ansip, in a radio interview will not help the situation:

“Our banknotes are more beautiful than euro banknotes.”

According to economists, the preparation to join the euro zone created some disadvantages for Estonia compared with neighboring countries, which enjoy a relative larger degree of flexibility by hanging on longer to their legacy currencies.

Wrong Place – Wrong Time

But that seems to be very, very short-term advantages.

Since last week the price of insuring the Estonian Medium Term Loans has jumped 4,45%, and the spread compared to German CDS’ has widened to nearly 8%.

The price on Estonian Sovereign CDS is now 113,01 basis points. That makes the insurance of Estonian government debt the sixth most expensive in Europe.

Source: Zero Hedge

Still, it a long way to go reach the Greek level that soared to nearly 1.000 basis points today.

Estonia is also an export-driven economy that quickly could be overshadowed by financial difficulties, particularly if the euro zone remains unstable, and neighboring countries like Poland and its Baltic neighbors insist on hanging on to their currencies.

“Investors will only be willing to lend to Estonia on favorable terms if Estonia can continue to compete,” Mr. Tilford, the London economist, says.

“That is where the biggest risks for Estonia now lie.”

Tallin In Trouble

And as all of the above is not enough; the Estonian capital – Tallin – is set to become the European Culture Capital in 2011.

But now, it turns out, that the city may lose 23.5 million kroon granted by the European Union because it has failed to provide Brussels guarantees for financing the culture capital programme, ERR reports, according to balticbusinessnews.com.

The so-called Mercour prize in the amout of 23.5 million kroons, a direct EU grant, has already been included in this year’s budget revenues of the city, but right now that payment is doubtful.

According to Brussels, if Tallinn wants to secure the funds it needs to submit guarantees by 28 June at the latest when Tallinn is visited by Sir Bob Scott, chairman of the assessment committee.

This is unlikely to happen since the government has not plans to issue any such guarantees before September.

Estonian Minister Laine Jänes, on the other hand, claims that the commission has been informed of such circumstances.

Welcome to the euro disaster zone, Estonia.

And good luck!

Related by the Econotwist:

Estonia: Banks Lost USD 23 million in Q1

Estonia: Something Doesn’t Seem Right

Estonian Newspapers Protesting With Blank Front Page

Businessman To Declare Hunger Strike If Not Paid

An Estonian Mystery

Swedbank Buy Greek Bonds With Estonian Money

Estonia Put Pressure On Journalists

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