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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTL #0144/01 1421432
ZNR UUUUU ZZH
R 221432Z MAY 09
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 1150
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 TALLINN 000144 
 
DEPARTMENT FOR EEB/CBA, EUR/ERA AND EUR/NB 
TREASURY FOR DAVID WRIGHT 
COMMERCE FOR ITA 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PGOV EFIN ECON EINV EN
SUBJECT: IMF CALLS ESTONIAN ECONOMY 'RESILIENT' AS 
GOVERNMENT SHAKE-UP AIMS TO ACHIEVE BUDGET AGREEMENT 
 
REF: A) Tallinn 57 
 B) Tallinn 78 
 
TALLINN 00000144  001.2 OF 002 
 
 
¶1. (SBU) SUMMARY: PM Ansip's May 21 dismissal of 
junior coalition members - including his Minister of 
Finance - demonstrate how contentious the recent 
debates over budget cuts have been.  Estonia's first 
quarter GDP in 2009 fell 15 percent over the same 
period in 2008.   The GOE needs to make painful budget 
cuts by year's end in order to meet Maastricht 
criteria and stay on track for Eurozone accession in 
¶2011.  By dismissing the Social Democrats, Ansip has 
consolidated his political base and removed an 
impediment to agreement on the budget.   While these 
political machinations are the talk of the town, there 
is some good news: the IMF, the Bank of Estonia (BOE) 
and Swedbank have all endorsed the GOE's focus on 
improving fiscal balance and investor confidence. 
END SUMMARY. 
 
¶2. (SBU) In mid-May, the Estonian Statistics Board 
released data indicating GDP declined by 15.6 percent 
in the first quarter (Q1) of 2009 compared to the same 
period last year, and by 6.5 percent since Q4 of 2008. 
(Note: The Bank of Estonia had forecast 2009 GDP 
contraction of only 8.9 percent in February. (Ref A) 
BOE analysts now believe the trend will slow in the 
second half of 2009 as export markets stabilize.  End 
note.)  Rising unemployment remains a significant 
concern, reaching 11.5 percent nationwide, and 
exceeding 14 percent in Estonia's predominantly 
Russian-speaking northeast region. 
 
¶3. (SBU) These grim statistics catalyzed already tense 
discussions among the three-party coalition that makes 
up the government.  In addition to falling GDP, the 
GOE has also been debating a new labor law that could 
contribute to even higher unemployment.  With 
coalition partners deadlocked, PM Andrus Ansip took on 
May 21 the long- anticipated step of dismissing his 
three cabinet members from the Social Democratic 
Party, including his Minister of Finance Ivari Padar 
(Septel). 
 
Tightrope Walking to the Euro 
----------------------------- 
 
¶4. (SBU) The GOE is counting on strict adherence to a 
3 percent budget deficit and Euro accession "as soon 
as possible" to propel Estonia's long-term economic 
recovery.  The Prime Minister himself is driving 
Estonian efforts to join the Euro by the beginning of 
¶2011.  Since Estonia's accession to the EU in 2004, 
the GOE has set - and then missed - several target 
dates for entry into the euro, primarily because of 
higher than average inflation.  Projected deflation of 
0.5 percent this year, however, has removed this from 
the GOE's list of concerns. 
 
¶5. (SBU) The GOE has already cut the FY09 budget once 
this year (by 7 percent), but coalition partners 
(particularly the now-dismissed Social Democrats) have 
struggled to agree on additional cuts necessary to 
stay within Maastricht limits, as well as a new labor 
law that could result in higher unemployment.  Ansip 
has made clear that he is willing to accept short-term 
pain (reduced spending and job losses) to keep 
Estonia's budget in check.  His approach has been 
largely endorsed by the IMF, the Bank of Estonia and 
Swedbank (the largest bank in Estonia) in recent days. 
Despite months of speculation about possible 
devaluation of the kroon, an IMF team in Tallinn May 
14-18 called Estonia's currency board system 
"successful" and "resilient" to the ongoing global 
economic crisis.  They lauded Estonia's "prudent 
fiscal policies for most of the decade..." but noted 
that the budget is now the major policy challenge for 
2009 and beyond.  Our contacts at the BOE and Swedbank 
both agreed that budget issues are more pressing than 
unemployment concerns right now.  If the GOE cannot 
make sufficient cuts to stay within the Maastricht 
deficit target (three percent of GDP), the BOE 
believes that access to credit markets will dry up in 
2010 and Estonia could be forced to seek IMF help. 
Both Swedbank and our BOE contacts have noted 
 
TALLINN 00000144  002 OF 002 
 
 
positively that the private sector and households have 
made a "remarkable" adjustment to the current climate, 
shedding debt and cutting costs faster than expected. 
 
¶6. (SBU) COMMENT:  By dismissing his smallest and 
least supportive coalition partner (Social Democrats), 
PM Ansip has demonstrated how far he is willing to go 
to keep the GOE budget on target.  Without the Social 
Democrats, however, Ansip's Reform Party and remaining 
coalition partner Isamaa and Respublica Liit (IRL) 
must either bring a new party into the coalition or 
find at least one opposition (or independent) MP to 
vote in favor of the proposed budget cuts.  (Note: 
Reform and IRL control 50 seats in the 101-member 
Parliament.  Negotiations among political parties are 
ongoing.  End Note.)  END COMMENT. 
 
DECKER