Estonia Faces `High Risk' of Euro-Adoption Bid Rejection, Danske Bank Says

Estonia, which aims to adopt the euro next year, faces a “high risk” of its entry bid being rejected, Danske Markets said, citing comments from EU Economic and Monetary Affairs Commissioner Olli Rehn.

Estonia’s entry “is not a done deal” and the European Commission “will very carefully evaluate the Estonian budget and inflation figures,” Rehn said in Brussels today.

Estonia, which says it has met all entry terms, would be the third east European country to join the euro region after Slovenia and Slovakia. The worsening of the financial situation in Greece and contagion to other European markets raise the risk of member countries halting the euro region’s expansion, analysts Lars Christensen, based in Copenhagen, and Violeta Klyviene, in Vilnius, wrote in a note today.

“We believe that especially the German government and the Bundesbank would be very skeptical about any euro enlargement,” they wrote. “There is still a high risk that Estonia will not get this - this is underlined by Olli Rehn’s comments today.”

The European Commission and the European Central Bank are due to report on May 12 on whether Estonia meets the currency bloc’s fiscal and inflation targets, serving as a recommendation for a final decision by the European Union in July.

Meet Conditions

The 2004 EU accession of 10 former communist nations obliged their governments to target euro adoption in line with the bloc’s fiscal and inflation targets. Standard & Poor’s Ratings and Fitch Ratings raised their outlooks for Estonia to stable from negative in February, citing the higher likelihood of a currency switch.

Prime Minister Andrus Ansip cut the deficit by 9 percent of output last year to meet budget terms, saying that would help the economy exit its worst recession since independence in 1991 more than any fiscal stimulus measures.

Estonia’s euro adoption will depend “on the political will among the current euro zone members to expand the zone, and they are likely to take a more stringent approach to the issue in the wake of the Greek crisis,” John Andrew, an analyst with the Economist Intelligence Unit in London, said in an e-mailed comment. “Although Estonia looks likely to succeed in its aim, we view this as still subject to doubt. There is therefore a risk that euro adoption could be delayed until 2012-13.”

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

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