NEWS / Foreign Exchange

Estonia: Bad news on euro adoption

We got more bad news from the Baltics today when the Estonian Finance Minister Aivar Soerd announced that the government had revised up its forecast for inflation, and at the same time said that he did not expect Estonia to fulfil the Maastricht criteria before after 2011. This is contrary to Prime Minister Andrus Ansip that recently said Estonian euro adoption by 2010 was realistic. We tend to be more in agreement with Mr. Soerd than Mr. Ansip on this matter.

The Finance Ministry revised up its inflation forecast to 4.9% in 2007 from 3.9% in its previous forecast that was published in August last year. Given the development in inflation (and the economy in general) in recent months the change of the forecast is not overly surprising. However, it is a reminder that the ???euro anchor2 clearly has become much less of an anchor not only in Estonia, but also in Latvia and to a lesser ex-tent in Lithuanian.

We continue to strongly recommend investors to increase hedging of currency risks in all three Baltic States.