Euro Drives Estonia Credit Risk Lower as Neighbors Dodge Greek Contagion

Euro adoption has helped Estonia distance itself from all but the strongest European economies in terms of credit risk as eastern states such as Poland waver in their ardor for the currency, shaken by a sovereign-debt crisis.

Estonia, the third-riskiest European Union member two years ago, is now among the 10 best. Its five-year credit-default swaps traded at 87 basis points today, followed by France at 83.7, the Czech Republic at 83, Austria at 68.7 and the U.K. at 66, according to data provider CMA. Poland’s CDS were at 159.6.

“Markets do understand and reward the amount of discipline these countries have imposed on themselves,” said Agnes Belaisch, who oversees $2.5 billion of emerging-market assets at Threadneedle Asset Management Ltd. in London. “So for Estonia, Czech status is the next frontier, or even Austria’s.”

Estonia had the EU’s only budget surplus and lowest public debt last year as it prepared to become the 17th euro member on Jan. 1. Eastern European neighbors including Poland, Latvia and Lithuania have said they may delay joining the currency union because of concern the Greek crisis may change the rules.

Euro-area finance ministers reached no agreement on a 12 billion-euro ($17.1 billion) aid payment to Greece at a meeting that ended early today in Luxembourg, saying Prime Minister George Papandreou needs to push through laws to cut the deficit and sell state assets.

Photographer: Georges Gobet/AFP/Getty Images

Andrus Ansip, Estonia's prime minister, has said the government would have imposed austerity measures even without the goal of joining the euro. Close

Andrus Ansip, Estonia's prime minister, has said the government would have imposed... Read More

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Photographer: Georges Gobet/AFP/Getty Images

Andrus Ansip, Estonia's prime minister, has said the government would have imposed austerity measures even without the goal of joining the euro.

Break Up Forecast

The euro zone may break up by 2013 as budget cuts slow growth in southern Europe and Germany balks at continuing to support Greece, the London-based Centre for Economics and Business Research said today.

“Sooner or later both the Greek population and international creditors will tire of fighting a losing battle, leading to a breakup of the currency union,” Chief Executive Officer Douglas McWilliams said in a statement.

Estonia’s $19 billion economy expanded 8.5 percent from a year earlier in the first quarter, the EU’s fastest growth rate, after wage cuts of as much as 30 percent since 2008 helped its goods compete abroad. The country endured the bloc’s second- deepest recession in 2008-09, behind Latvia. Gross domestic product shrank almost 20 percent and probably won’t reach the pre-crisis level until 2015, according to Finance Ministry.

EU countries must meet criteria for inflation, deficits, debt, long-term interest rates and exchange-rate stability to qualify for euro membership.

Estonian Discipline

Estonia has kept its budget deficit below the EU limit of 3 percent of GDP every year since joining the bloc in 2004. Prime Minister Andrus Ansip has said the government would have imposed austerity measures even without the goal of joining the euro.

The country’s credit-default swaps, used to speculate on a borrower’s ability to repay debt or hedge against losses, fell below those of Slovakia and Slovenia, the two other eastern euro members, on June 1. Slovakia’s CDS traded at 90.5 basis points today and Slovenia’s at 99.8, according to CMA prices.

Slovakia, which adopted the euro in 2009, had a budget deficit of 7.9 percent of GDP last year and public debt of 41 percent. Slovenia, which joined in 2007, had a 5.6 percent shortfall and debt of 38 percent. The euro-area averages were 3.2 percent and 85.4 percent.

Estonia had a budget surplus equal to 0.1 percent of GDP last year and public debt totaled 6.6 percent. The country has no outstanding bonds and has no plans to sell any, according to Finance Minister Juergen Ligi.

‘Clearly Stronger’

“Estonian CDSs could turn out to remain lower than the CDS levels in Slovakia, Slovenia due to the strong recovery and the extraordinarily robust public finances,” said Annika Lindblad, an economist at Nordea AB in Helsinki. Estonia’s debt and deficit figures “are clearly stronger than the ones for Slovakia and Slovenia,” she said.

Voters in Slovenia on June 5 rejected plans to raise the retirement age to prevent an aging population from straining the budget. Fitch Ratings said June 6 that Slovakia will probably exceed its budget deficit target this year as the government fails to implement promised savings.

Estonia implemented austerity measures equal to 9 percent of GDP in 2009, preventing the budget gap from ballooning and keeping the country on course to adopt the euro.

“Europe’s crisis experience clearly speaks for the need of fast consolidation and reforms,” Ligi said today in an e-mailed response to questions. “The key question is the political will, and those who were looking for excuses to not cut spending are now facing bigger problems.”

Deficits in Hungary, Poland, Latvia and Lithuania all exceed the EU limit. The four countries, which joined the bloc with Estonia in 2004, have suggested they may delay adopting the common currency because of concern about the costs of bailing out Greece, Ireland and Portugal.

Don’t ‘Kill Yourself’

Latvian central bank Governor Ilmars Rimsevics said June 7 that the euro shouldn’t be introduced “at any price.” Lithuanian counterpart Vitas Vasiliauskas said two days later that the goal of adopting the euro in three years is “not something to kill yourself over.”

Latvia’s credit swaps traded at 212.5 basis points today, down from 1,193 in March 2009, the EU’s highest at the peak of the global crisis. Lithuania’s traded at 210. Hungary has the highest debt level in eastern Europe and the region’s most expensive credit insurance at 289 basis points.

Sweden boasts the EU’s lowest credit risk, with the country’s credit-default swaps trading at 26 basis points, followed by Finland and Denmark at 33.8, the Netherlands 35.9 and Germany 42.8.

CDS prices typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporters on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net; Aaron Eglitis in Riga at aeglitis@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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