VZCZCXRO1634
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHTL #0057/01 0650704
ZNR UUUUU ZZH
R 060704Z MAR 09
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 1054
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 TALLINN 000057 
 
DEPARTMENT FOR EEB/CBA, EUR/ERA AND EUR/NB 
TREASURY FOR DAVID WRIGHT 
COMMERCE FOR ITA LEAH MARKOWITZ 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV EFIN ECON EINV EN
SUBJECT: Estonia Adapting as Economy Reels 
 
REF: 08 TALLINN 355 
     08 TALLINN 366 
     08 TALLINN 392 
 
¶1. (U) SUMMARY: While confidence in the government 
remains strong, recent economic data now show that 
Estonia?s economic slowdown has been more dramatic 
than anyone expected.  The Government of Estonia (GOE) 
has responded quickly, cutting the FY2009 state budget 
by a further 6.7 percent on February 20.  The Bank of 
Estonia is readying new risk scenarios, and has signed 
a preliminary agreement with Sweden's Riksbank to 
guarantee financial stability in Estonia in the event 
the situation worsens.  The mood among investors and 
the private sector is gloomy, but the overall public 
perception is that the GOE is responding as quickly 
and effectively as possible under the circumstances. 
END SUMMARY. 
 
Numbers Speak Louder Than Words 
 
¶2. (U) On February 17, the Bank of Estonia (BOE) 
published an economic policy statement announcing that 
2009 GDP may contract as much as 8.9 percent, compared 
to the bank's October forecast of "only" 2.1 percent 
contraction this year.  While the October forecast 
predicted the unemployment rate would reach 7 percent 
in 2009, data now show that Estonia had already 
reached 7.6 percent unemployment in the 4th quarter of 
¶2008.  That figure is still rising.  On the other 
hand, one of the few upsides of the current crisis has 
been the slowing of inflation.  The Bank of Estonia's 
October forecast predicted inflation for 2009 would 
hit 4.8 percent, but its latest estimate is now less 
than half that amount, at two percent.  Economic 
growth and external demand are still expected to begin 
recovering in 2010. 
 
A Rock and a Hard Place: Devaluation vs. Budget Cuts 
 
¶3. (U) GOE and Bank of Estonia officials have 
repeatedly stressed that there is no need to devalue 
the Estonian kroon, which would deal another blow to 
investor confidence, and could jeopardize the 
country's goal of meeting the Maastricht inflation 
criteria to join the Euro zone in 2011.  The GOE has 
prioritized cutting the 2009 state budget to ensure a 
deficit below 3 percent of GDP (another Maastricht 
criteria).  On February 20, the Estonian parliament 
passed a negative supplementary budget, cutting 
revenue projections by EUR 620 million and 
expenditures by EUR 420 million, or 6.7 percent of the 
previous total.  (Note: The budget cut was tied to a 
confidence vote in PM Ansip's government, and passed 
by a margin of 61-39 in the Parliament.  End note)  In 
a rare bit of good news, Minister of Finance Ivari 
Padar announced March 5 that tax receipts for the 
first two months of 2009 were USD 4.8 million above 
the reduced February 20 revenue projection. 
 
¶4.  (U) This good news aside, if the economy continues 
to slow more quickly than the latest forecast, the GOE 
may need to start a new round budget cuts.  This would 
likely create tension within the governing coalition, 
as local and EU parliamentary elections are 
approaching, making agreement on unpopular budget 
decisions even harder.  Nevertheless, after the GOE 
announced it had reached agreement within the 
coalition on the current budget cuts, support for PM 
Ansip's Reform Party increased from 16 to 19 percent, 
making it the most popular party in Parliament. 
 
Sweden stepping up to protect their FDI 
 
¶5. (U) On February 27th, the Bank of Estonia and 
Sweden's central Riksbank announced a preventive 
agreement totaling USD 1.1 billion to guarantee 
stability and increase security in financial markets 
in case the financial crisis deepens in Estonia. 
Andres Lipstok, the Governor of the Bank of Estonia 
told the press that this agreement with the Riksbank 
affords security in addition to high liquidity and 
capital buffers that Swedish bank subsidiaries 
currently have in Estonia, and is an evidence of the 
importance of cross-border cooperation to integrated 
financial markets.  (Note: Swedish banks have 
currently over 70 percent market share in Estonia. 
 
TALLINN 00000057  002 OF 002 
 
 
End note.)  The reaction to this news in the Estonian 
business community was welcoming, and most still 
believe that the Estonian financial sector is strong 
enough that banks will not need that guarantee.  The 
consensus seems to be that the top priority for the 
country's economic well-being is the GOE's ability to 
adapt to economic changes, and manage the budget 
deficit within Maastricht criteria. 
 
The Mood on the Street: Gloomy but No Sign of Panic 
 
¶6.  (U) At the popular annual Estonian Employers' 
Confederation (EEC) business conference "Kite Fly 
2009" in mid-February, most speakers stressed that the 
Estonian economy has "probably" not hit bottom yet, 
and the worst is still ahead.  EEC Chairman, Enn 
Veskimagi, was content overall with changes the GOE 
has already made, but he suggested that even stricter 
measures should be taken, such as further cuts to 
public sector salaries, freezing pension increases, 
and reducing defense expenses.  A poll taken at the 
conference revealed that most participants thought 
Estonia will not begin to recover for 3 years.  The 
American Chamber of Commerce in Estonia (AmCham) held 
a similar roundtable featuring key speakers Jurgen 
Ligi, chairman of the Parliament's Economic Affairs 
Committee, and Hanno Lindpere, Country Manager for 
Ernst & Young.  While Ligi, (a politician often taken 
at his word, and through whose committee any 
devaluation of the kroon legally would have to pass) 
tried to reassure AmCham by telling members that his 
own life savings were in kroons, Lindpere had faint 
praise for the GOE.  He stated that in his evaluation, 
while the GOE had not done anything particularly 
positive to help the current crisis, at least it had 
done nothing to worsen the situation, as the 
governments of neighboring Latvia and Lithuania had, 
he said. 
 
¶7.  (U) COMMENT:  Post will continue watching the 
situation and engaging continuously, as the GOE 
attempts to keep ahead of the financial crisis and 
mitigate its effects as much as possible.  The GOE 
remains firmly committed to Eurozone admission at the 
earliest possible date and, in this respect, sees the 
slowdown as an opportunity (rather than a challenge) 
for managing past inflationary problems.  PM Ansip has 
helped his credibility on this issue by opposing any 
easing of Euro entry conditions, or a special bailout 
fund for the newer EU members.  It is a delicate 
balance, but for now, the GOE has the public's 
confidence.  END COMMENT. 
 
DECKER