Euro Crisis Melts Baltic Fortitude for 2014 Currency Switch
Talk of adopting the euro is thin on the ground before Lithuanian elections next month as politicians align with popular opposition to the switch.
The Baltic nation will abandon the litas “when the euro zone is ready,” Prime Minister Andrius Kubilius said Aug. 28, putting into question a 2014 target to follow Estonia into the currency. While Latvian officials retain plans to join the euro area that year, support among the population is at a record low.
Latvia and Lithuania, the only remaining eastern EU members to have planned fast-track euro adoption, are among the fastest- growing economies in the European Union after record budget cuts in 2009-2010. They are losing their appetite for the euro, once considered a tool to spur growth and increase confidence across eastern Europe, as the 17-nation currency union grapples for a third year with a deepening debt crisis.
“It’s clear that the attractiveness of the euro area has suffered from the euro crisis,” said Christian Schulz, senior economist at Berenberg Bank in London. “These rescue packages, if you have to contribute to them, look expensive. For politicians, there’s relatively little to gain from advocating euro entry.”
Latvia’s economy is outpacing that of Estonia, which adopted the euro in 2011, surging 5 percent from a year earlier in the second quarter, the EU’s fastest clip. Lithuanian gross domestic product matched Estonia’s 2.2 percent growth rate.
The yield on Latvia’s dollar bond due 2021 fell to a record-low 3.292 percent Sept. 14, data compiled by Bloomberg show. It was at 3.57 percent at 11:54 a.m. in Riga, the capital. The yield on Lithuania’s 2022 bond was 3.65 percent today, the lowest since it began trading this year. Estonia has no outstanding bonds.
Opposition among Latvians to adopting the euro reached as much as 59 percent last month, compared with 13 percent support for the move, the lowest ever, according to an SKDS poll of 1,003 people that had a margin of error of 3 percentage points. Fifty-one percent of Lithuanians were against joining the euro area, according to an April survey by Eurobarometer, up from 47 percent in May 2008.
“It’s quite clear that if everything people hear about the euro zone is crisis, crisis and more crisis, then even more people will ask ‘so why join?” Latvia Prime Minister Valdis Dombrovskis said Sept. 14 at a conference in Riga.
Latvia sticks by its 2014 adoption date, he said. Latvia’s leaders say the switch will remove devaluation risks, reduce interest costs and boost trade.
Baltic opposition echoes regional apprehension toward the euro. While euro-zone nations purchase more than half of the exports of eastern European nations such as Poland and the Czech Republic, seven of the 10 ex-communist countries to join the EU since 2004 have yet to adopt the currency.
Bulgaria has indefinitely delayed plans to scrap the lev, Prime Minister Boyko Borisov told the Wall street Journal in a Sept. 4 interview, while neighboring Romania will reassess its 2015 euro-adoption deadline after elections in December.
Poland, which three years ago shelved plans to join in 2013, deems the euro “completely unattractive,” according to July remarks from Prime Minister Donald Tusk. Hungary won’t adopt the currency before 2018, Premier Viktor Orban said in March, while Czech Prime Minister Petr Necas wants a referendum before joining no earlier than 2020.
Poland, the EU’s biggest eastern economy, has benefited from a flexible zloty exchange rate, which has made its exports more attractive, supporting growth in gross domestic product that may reach 2.5 percent this year, according to the government. The euro area will contract 0.4 percent in 2012, the European Central Bank predicted Sept. 6.
In addition, those outside the currency zone aren’t required to contribute to its 500 billion-euro ($650 billion) rescue fund and 440 billion-euro forerunner, created to save debt-ridden nations such as Greece and Portugal from bankruptcy.
Euro members Slovakia, Slovenia and Estonia could contribute 5.8 billion, 3 billion and 1.3 billion euros to the European Stability Mechanism, should its cash be allocated in full, according to the fund’s treaty. Slovakia and Estonia can pay in less for the first 12 years because their GDP per capita is below 75 percent of the EU average.
“Whereas three or five years ago, you could have said you had to allude to wanting to become a part of the euro club because clearly that’s very sensible, you can’t demonstrate that at the moment,” said Jeremy Brewin, who helps manage $4.5 billion in emerging-market debt at Aviva Investors in London in a Sept. 3 phone interview. “Wait and see is a strategy which makes more political and economic sense.”
While Estonia’s government has agreed to stump up cash for rescue packages, adopting the currency helped drive 7.6 percent economic growth last year, the EU’s fastest rate, by boosting fixed capital investments to a three-year high and trimming borrowing costs, the central bank and government have said.
Banks’ funding costs have fallen to as much as 100 basis points, or 1 percentage point, below those paid by lenders in neighboring Latvia and Lithuania, Riho Unt, head of Stockholm- based SEB AB (SEBA)’s local unit in Tallinn, said in May.
Investors speculate on Estonia’s creditworthiness using credit-default swaps, which cost 101 basis points to insure government debt against non-payment for five years, the second- lowest among 15 eastern European nations tracked by Bloomberg. Latvia’s cost 181 points and Lithuania’s cost 172.
While politically tricky, euro adoption “continues to make sense” from an economic standpoint because the Baltic nations would be entitled to bailouts in the event of a new crisis, according to Berenberg’s Schulz.
Support among Estonians of the common currency has increased by seven percentage points from last November to 71 percent in August, according to Eurobarometer.
The Baltic region suffered the EU’s steepest recessions after Lehman Brothers Holdings Inc. collapsed in 2008. Governments slashed spending and raised taxes by as much as 15 percent of economic output during the next two years, triggering a surge in unemployment and driving down public wages by as much as 30 percent.
The measures sought to preserve fixed exchange rates to the euro, a precursor to adopting the currency and a means of lowering devaluation risks and borrowing costs. Lithuania failed to adopt the single currency in 2006 because its inflation rate was 0.1 percentage point higher than permitted.
The euro remains Lithuania’s “strategic goal,” according to Kubilius, whose Homeland Union placed fourth with 7.7 percent backing before October’s vote in an July 20-29 opinion poll by Spyter Tyrimai for the Delfi online news service. He said Aug. 28 that he’d “like to see a clearer and more stable situation in the euro zone at the time when we adopt the euro.”
Kubilius’s biggest rival, Algirdas Butkevicius, whose Social Democratic Party leads with 17.9 percent support, calls euro adoption in 2014 “unrealistic,” preferring to wait one or two years more.
“What’s the rush now for us to pay for their bailouts when it’s been obvious since at least 2004 that Greece had to take measures to avoid bankruptcy?” he said in a Sept. 18 interview in Vilnius. “It may be a bit sad that we could be the last country in the Baltic region to adopt the euro but let’s see first what happens next.”
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