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Moody's Investors Service has today confirmed the foreign and local currency ratings of the Government of Estonia at A1.



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SOURCE  BBN: Marge Tubalkain-Trell
marge.tubalkain-trell@araripaev.ee 23.04.2009 13:39

Moody's Investors Service has today confirmed the foreign and local currency ratings of the Government of Estonia at A1. 

The long-term foreign currency bank deposit ceiling was also confirmed at A1. The outlook for these ratings was changed to negative. This rating action concludes the review for possible downgrade that was initiated on 10 February 2009.

"Moody's has concluded that the Estonian government's creditworthiness is likely to remain resilient in the face of a deep and potentially prolonged recession," says Kenneth Orchard, Vice President-Senior Analyst in Moody's Sovereign Risk Group. "The government is working to keep the budget deficit under control, liquidity is secure and the government is relatively well isolated from problems in the banking sector."

Disciplined fiscal policy during the boom years, plus an impressive fiscal adjustment in reaction to the current circumstances, mean that the budget deficit is likely to remain within the 3% of GDP Maastricht threshold in 2009. This performance -- one of the best in the EU -- should permit Estonia to exercise its "exit strategy" and officially adopt the euro in January 2011.

Moody's views entry into the Eurozone as positive for Estonia's creditworthiness. "Euro adoption would eliminate currency risk as well as boost economic confidence by positively differentiating Estonia from other countries in the region," says Orchard.

Furthermore, having paid down debt and saved budget surpluses over many years, Moody's understands that the government is now comparatively free from financing constraints. "Despite the difficult conditions in the international capital markets, the government is able to easily finance its budget deficit by running down its fiscal reserve and borrowing from the multilateral development banks," explains Mr. Orchard. "The government has minimal debt outstanding, all of it borrowed from official sources."

Moody's also notes that, unlike most other European governments, Estonia's implicit liabilities from the financial sector are negligible. "Estonia's banking system is almost entirely owned by large banks from other EU countries, and the parent banks are expected to support their Estonian branches and subsidiaries with additional capital if required," says Orchard.

Moody's acknowledges that the parent banks may struggle to support their Estonian subsidiaries in an extreme scenario, but the legal, regulatory and operational characteristics of these arrangements mean that the home country government is more likely than the Estonian government to bear the costs of any bank rescue. The Swedish government has explicitly stated that its support and guarantee scheme for Swedish banks is available for its banks' Baltic subsidiaries, and the Swedish and Estonian central banks have entered into a precautionary arrangement to boost mutual financial stability.

The negative outlook for the Estonian government's ratings reflects the high degree of uncertainty for the Estonian and regional economic outlook. Although recent developments in the external accounts suggest that the point of maximum pain has already passed, Moody's believes that the Estonian economy is unlikely to stabilise without some support from external demand. A deeper and longer recession could cause the budget deficit to breach the 3% threshold, which would delay euro adoption. Larger budget deficits and a more uncertain outlook for entry into the Eurozone could likely place some modest downward pressure on the government's rating.

Moody's recognises that an additional risk is related to possible contagion from Latvia, particularly in the unlikely event that Latvia's currency peg breaks or international financial support for the Latvian government is withdrawn. Even if the direct effects were limited, the indirect impact on consumer and investor confidence could create additional problems for the Estonian economy.

In a related action, Moody's affirmed the Estonian government's short-term rating at Prime-1. The foreign currency bond ceiling was affirmed at Aa1 with a stable outlook.

SOURCE  BBN: Marge Tubalkain-Trell
marge.tubalkain-trell@araripaev.ee 23.04.2009 13:39


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