UPDATE 1-Estonia gets S&P upgrade, shows way for Greece, others

Tue Aug 9, 2011 10:58am EDT

Aug 9 (Reuters) – * SP upgrades Estonia’s rating to AA-
from A

* Rare positive move amid European debt woes

* Supportive Nordic banks reduce financial sector risks

(Adds quotes, c.bank quotes, background)

By David Mardiste

TALLINN, Aug 9 (Reuters) – Euro zone minnow Estonia earned a
ratings upgrade from Standard Poor’s on Tuesday, reaping the
benefits of an internal devaluation focused on slashing public
wages that serves as a possible model for struggling economies
elsewhere in the currency bloc.

Estonia, which had a fixed currency peg before
adopting the euro this year, had to slash spending and raise
taxes as it sank into recession in 2009, when its output plunged
14 percent. It has since begun an export-led recovery and is
expected to be one of the fastest-growing economies in the
crisis-hit euro zone this year, with the central bank
forecasting a 6.3 percent expansion.

SP raised Estonia’s long-term sovereign credit rating to
AA-minus from A and said the outlook was stable.

“Should Estonia continue to post sustained growth without
generating internal, primarily fiscal, or external imbalances,
we could consider raising the rating over the next several
years,” SP said in a statement.

The rating agency said a return to excess reliance on
external debt or an unexpected widening of the fiscal gap would
lead to a ratings cut.

Like Baltic neigbours Latvia and Lithuania, Estonia had to
cut back on public sector spending in the face of the recession
to stop its budget deficit getting out of hand.

It was also able to draw on substantial budget reserves
built up during earlier years of strong growth.

The Baltic cutbacks were a forerunner of the medicine
prescribed in the past year or so to euro zone nations Greece,
Ireland and Portugal as they were forced to seek international

“The ongoing debt crisis in Europe highlights once again the
importance of keeping public finances in check,” Estonian
central bank deputy governor Ulo Kaasik said.

“Estonia must follow its budget strategy and post a
consolidated budget surplus in 2013,” he said in a statement.

SP praised Estonia’s “consensus-driven policy framework,
economic flexibility, transparent and productive public sector,
sound fiscal management and strong economic growth prospects”.

“We expect policy to remain predictable, prudent, and
supportive of growth over the ratings horizon,” it added. SP
raised Estonia’s short-term rating to A-1-plus from A-1.

For 2011, SP said it expected net exports to contribute 1
to 2 percentage points to overall GDP growth.

It said it expected investment associated with sizeable
inflows of European Union aid to be a main driver of GDP growth
over the next few years, with a recovery in private consumption.

SP said Estonia had also been helped by the fact Nordic
parent banks had been supportive. From 2008 to 2010 they
injected capital into their Estonian subsidiaries equal in total
to more than 5 percent of Estonian GDP.

It said wealth levels were a rating weakness. Although it
expected GDP per capita to rise to $20,000 by 2014, it would
still be below the ‘A’ median of $24,500.
(Reporting by David Mardiste; Editing by Hugh Lawson and Susan

($1=.6907 Euro)

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