At the same time governments in the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) are struggling to convince sceptical market actors that necessary budget austerity measures will be implemented. The main reason for the scepticism is that the PIIGS are in an early phase in their consolidation.
The main remaining hurdle in the Baltics is a second and final approval in Latvia on December 20. As the Latvian government rules in majority since the surprisingly clear victory in the October election, SEB’s experts do not foresee any negative surprises which should upset the market on Monday.
“Our reading of the three budgets is that all governments will adhere to their strict fiscal policy, with Latvia continuing to tighten its budget. This is all in line with expectations in SEB's Eastern European Outlook and Nordic Outlook reports published earlier this autumn,” says Mikael Johansson, head of Eastern European economic research at SEB.
According to the Estonian budget for 2011 spending will increase by 5 per cent and revenue by 2 per cent. This is expected to lead to a slight increase in deficit to 1.6 per cent of gross domestic product (GDP) in 2011 from 1.3 per cent of GDP in 2010, which is lower than any other euro zone member; Estonia will become a member from 1 January 2011.
The Lithuanian government is freezing the expenditures in the 2011 budget and the deficit is forecasted to come down to 5.8 per cent of GDP in 2011 from expected 8.1 per cent in 2010. The deficit cut is due to come from fighting the shadow economy and stronger growth.
Latvia's 2011 budget includes tax increases and spending cuts equal to 280 million Latvian lats, which corresponds to ca 2 per cent of GDP. During the last years Latvia has implemented tightening measures representing a total of 14 per cent of GDP. The budget deficit is expected to decrease to 5.5 per cent of GDP in 2011 from 8.5 per cent in 2010. Thereby Latvia is continuing to fulfil the targets set together with the lenders EU and IMF (the program runs from December 2008 to December 2011).
“The only potential hurdle is that the Latvian government hasn't reached agreement with the lenders for temporary reducing the payments into the country's second-pillar pension system by 2 per cent. Discussions on this topic are expected to continue in January. However, the sum concerning this austerity measure is not large, less than 50 million lats,” Johansson says.
SEB’s experts expect that the Baltic countries will continue to enjoy market confidence. In the past year, investors have regained their confidence in their euro-pegged currencies and the perceptions of the potential default risks in the Baltics, measured by CDS contracts, have decreased markedly. In the last two months pricing of CDS contracts for the PIIGS economies have shown an upward trend, whereas the Baltic CDS contracts have continued slightly downward.