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Fitch: anchor of euro adoption slipping in Eastern Europe
28.09.2007
Fitch Ratings-London-28 September 2007: Fitch Ratings says the
timetable for European Economic and Monetary Union (EMU) is slipping
further in a number of countries in Eastern Europe. That is one of
the conclusions in a report published today entitled "EMU Convergence
Report: 2007", which reviews the timetables, risks and rating
implications of the new EU member states' road to the euro.
"The prospective timetable for euro adoption is continuing to slip
across much of New Europe, owing to rising inflation in the Baltic
States, euro-scepticism in the Czech Republic and Poland and the
challenge of managing real convergence in Bulgaria and Romania," says
Edward Parker, Head of Fitch's Emerging Europe Sovereign Group in
London.
The adoption of the euro is likely to be a material medium-term
driver of sovereign rating actions in Eastern Europe. Fitch believes
it would render balance of payment and currency crises negligible,
and could lead to one- or two-notch upgrades of Foreign Currency
Issuer Default ratings (FCIDR). Cyprus and Malta will become the 14th
and 15th countries to join the euro area in January 2008, following
Slovenia in January 2007. Accordingly, Fitch upgraded the FCIDR of
Cyprus to 'AA-' (AA minus) from 'A+', and of Malta to 'A+' from 'A'
in July, after the formal decision of the Ecofin Council.
"Fitch believes there is a good prospect that Slovakia will join the
euro in January 2009 and it revised the Outlook on its FCIDR of 'A'
to Positive in July," says Mr Parker. However, there are risks to
meeting the inflation criterion, particularly if the EU authorities
adopt a harsh interpretation of a "sustainable" price performance or
Exchange Rate Mechanism (ERM) membership without "severe tensions".
"Its treatment by the EU authorities could be a key test case with
systemic implications for the region," says Mr Parker. After
Slovakia, however, Fitch anticipates a three year hiatus until the
next country joins the euro area. Indeed, none of the other six 2004
EU entrants presently have clear official target dates, and no new
country has joined the ERM II for nearly two years.
For the Baltic States, the agency expects rising inflation and
macroeconomic imbalances to delay euro adoption until 2012 for
Estonia, and 2013 for Lithuania and Latvia (the latter of which Fitch
downgraded to 'BBB+'/Outlook Stable from 'A-' (A minus)/Outlook
Negative in August). Excise tax rises, supply shocks and real income
and price level convergence, in combination with fixed nominal
exchange rates, will make it difficult to fulfil the inflation
criterion, so even longer delays are possible.
Fitch does not expect Poland and the Czech Republic to join the euro
until 2012 and 2013, respectively. A lack of political will appears
to be the main constraint - the failure to enter the ERM II has
already closed off entry before 2011 - so the next round of elections
will be significant. They will also need greater fiscal discipline and
to maintain low inflation. Fitch still believes 2014 is the most
likely date for Hungary. Despite the government's good progress to
date, sustaining fiscal consolidation will be challenging,
particularly with elections due in 2010.
Fitch's forecasts for euro adoption for Bulgaria and Romania are 2013
and 2015, respectively. But these are uncertain as both have a long
way to go on real convergence, are showing signs of overheating and
will find it hard to meet the inflation criterion for many years.
Bulgaria's failure to join the ERM II may point to reservations over
its membership by the EU authorities.
The report will be available later today on the agency's subscription
website, http://www.fitchresearch.com/
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, http://www.fitchratings.com/
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.
Contact:
Edward Parker, London
Tel: +44 (0)20 7417 6340
David Heslam
+44 (0)20 7417 4384.
Media Relations:
Peter Fitzpatrick, London
Tel: + 44 (0)20 7417 4364
Fitch Media Department
101 Finsbury Pavement
London, EC2A 1RS
Fitch Press Release
R-4-145729-42335268-2-252-UK1-3BBB0D2D@xmr3.com