Analysts doubt whether Estonia will qualify for euro entry in 2011.

TALLINN--Moody's estimates that Estonia will not be ready to adopt the euro in 2011, reports news agency LETA. Moody's Baltic regional senior analyst Kenneth Orchard said that flash calculations indicate that the government should be able to cut the spending by at least 20 percent in the second half of this year in the year-on-year comparison in order to achieve its budget deficit objective.

"It will, however, be very difficult [to qualify for the eurozone]," he said, noting that it seems that Estonia would need more time to comply with all Maastricht criteria.

According to the EU methodology, Estonia's budgetary deficit in the first half of 2009 came to 9.3 billion kroons (596 million euros).

The Treasury's reserves rose in September against the previous month, showing that the budget deficit for now has stabilized. Reserves, excluding non-liquid assets, rose to 13.2 billion kroons from 12.7 billion kroons at the end of August. The government has cut the 2009 deficit by 9 percent of GDP in recent months after reserves shrank by more than a third in April from the end of last year.

When submitting on behalf of the government the 2010 draft budget, Prime Minister Andrus Ansip said he believed that there would be no need to draft a supplementary budget next year. "The fingers of only one hand will suffice in order to count the European Union member states that will be able to keep the budgetary deficit within three percent," he boasted to the Parliament, noting that Estonia is among these very few countries.

The PM noted that the strict budgetary policy has helped Estonia in the context of the crisis. "The current year's budgetary deficit in many European countries is higher than the entire Estonian government sector debt burden, which is the smallest in the EU. This will also be the case in 2010," he said.

The budget shortfall, including social security and state and municipal spending, was 3.1 billion kroons in the second quarter and a revised 6.1 billion kroons in the first, reported the statistics office. The gap corresponds to 4.4 percent of gross domestic product, according to Bloomberg calculations based on the Finance Ministry's forecast of GDP for 2009.

The EU deficit limit of three percent of gross domestic product this year is Estonia's main obstacle to meeting euro-entry terms as revenue falters during the recession. Risks of growing unemployment and increased spending by local governments ahead of municipal elections on Oct. 18 have grown in the past months.

Ansip explained that the State budget revenue is 84 billion kroons and spending totals 89.6 billion kroons, which he believes means that Estonia will be able to comply with all criteria for the adoption of the euro in January 2011.

Estonia must bring its budget gap within the EU's threshold this year to keep its euro goal intact, and can't assume the bloc will relax its rules, Standard & Poor's said on Sept. 17. The Central Bank said then reaching the EU's budget target this year isn't a given, though the lender of last resort interprets the EU's Stability and Growth Pact as allowing for some flexibility.

Edward Parker from Fitch does not believe that Estonia could keep the budgetary deficit below 3 percent of GDP this year. "In the context of the scope and impact of the economic decline, it is unlikely," he said.

Nordea Bank's Finnish analyst Annika Lindblad noted that Estonia's "forceful cuts in spending" and the sale of the shares of Eesti Telekom might bring the deficit "at least somewhere in the vicinity of 3 percent."

Credit Default Swap spreads on five-year Estonian debt are down to about 206 basis points (2.06 percent), according to CMA DataVision prices. The spreads peaked at 737 on Feb. 17. The narrowing spread signals growing investor confidence in the country's government.

Swedbank's macroanalyst Maris Lauri explained that the first half of the year was still affected by the initial budget and clear changes only occurred in July when the second cost-cutting package entered into force. "Now it is important to spend modestly, as the State has in the past few months, and find additional sources of revenue," she said.

According to adjusted data, the general government sector deficit in 2008 in Estonia was 2.7 percent and the gross debt level was 4.6 percent of GDP, writes Statistics Estonia. The general government budget deficit was still within the limits allowed in the Maastricht Treaty.

Staff and wire reports