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Lithuania Commits to Seek Euro Adoption in 2015

Lithuania’s new government gave its backing to the euro as officials pledged to follow the country’s two Baltic neighbors by adopting the currency in 2015.

Prime Minister Algirdas Butkevicius met Finance Minister Rimantas Sadzius and central bank Governor Vitas Vasiliauskas today in the capital, Vilnius to set what he called the “ambitious goal.” Lithuania meets all European Union criteria to join the euro area except on inflation, Vasiliauskas said.

The decision is a vote of confidence in the euro as the currency region grapples with its second recession since the debt crisis broke out in 2009. The 2015 target would probably make Lithuania the last of the three Baltic nations to introduce the euro, with Latvia planning to join the euro area next year after Estonia made the switch in 2011.

“It’s a general positive for the whole EU story because it shows that countries are still looking to converge and join the euro zone,” ING Groep NV economist Simon Quijano-Evans said today by phone from London. While taming inflation won’t be easy, Lithuania’s plan “does seem realistic,” he said.

The yield on Lithuania’s dollar bond due 2022 fell to 3.299 percent at 1:20 p.m. in Vilnius, down from 3.36 percent yesterday. The cost to insure its debt against non-payment for five years using credit-default swaps is 98 basis points, 36 points more than for Estonia, data compiled by Bloomberg show.

Near Miss

Lithuania will set up a task force to oversee progress toward euro adoption and ensure other political decisions don’t conflict with that objective, Butkevicius said. A 2007 plan to join the euro area failed because inflation was 0.1 percentage point more than the level permitted by the EU.

“We certainly don’t want that to happen this time,” Vasiliauskas told reporters. “We see a window where we can meet the inflation criteria.”

The government will maintain fiscal discipline, while state institutions will avoid raising regulated prices to bring price growth within the EU limit, according to the central bank chief.

Lithuania’s average 12-month inflation rate under EU methodology was 3.2 percent in December, exceeding that month’s 2.8 percent threshold for euro adoption. The limit is derived from the average inflation of the three EU member states with the slowest price growth, plus 1.5 percentage points.

Wage Promise

Butkevicius said officials would monitor the effect of higher wages and additional state spending on inflation. In the run-up to last October’s elections, his party vowed to boost the minimum wage and raise social benefits after four years of austerity while also narrowing the budget deficit.

This year’s budget envisages narrowing the fiscal shortfall to 2.5 percent of gross domestic product from 3 percent in 2012, the maximum allowed by the EU for countries within the euro region, as the economy grows an estimated 3.5 percent.

The government plans to raise social spending and boost salaries further after approving an 18 percent increase in the minimum wage in December, Butkevicius said.

The announcement of a target date for euro adoption is probably a sign that Lithuania is preparing to sell international bonds, according to Mohammed Kazmi, emerging-markets strategist at Royal Bank of Scotland Plc.

Investor Concerns

“Commitment to euro accession is an attempt to improve market conditions for issuance and calm investor concerns surrounding both inflation and public finances,” Kazmi said today by e-mail from London.

The country, which needs to raise an estimated total of $2 billion in international markets this year, will probably offer about $500 million of bonds “very soon,” Kazmi said. Sadzius declined to comment when asked today about a possible bond sale.

Risks to Lithuania’s euro plan include weaker-than-estimated GDP growth, which would put pressure on the budget, and a lack of political will if Europe’s debt crisis worsens, according to Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London.

“If the debt crisis flares up again, will Brussels and Frankfurt be reluctant to admit new members?” he said today by e-mail. “And perhaps more importantly, will Vilnius still want to join?”

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