Fitch: Euro Adoption Timetable Slipping Further
13:50, 31. august 2006
31.08.2006

Fitch Ratings-London-31 August 2006: Fitch Ratings says there has
been a significant systemic setback to the prospects of euro adoption
across central Europe over the past 12 months. The agency has today
revised the Outlook on Estonia's foreign currency Issuer Default
ratings ("IDR") of 'A' to Stable from Positive as it does not now
expect the country to adopt the euro until 2009-2010.

"The timetable for euro adoption is slipping across central Europe
owing to the difficulty of meeting the intrinsically harshly
specified inflation criterion and, in many countries, a political
ambivalence towards early adoption coupled with the challenge of
painful fiscal retrenchment," says Edward Parker, Head of Fitch's
Emerging Europe Sovereign Group in London. "Moreover, the EU's
rejection of Lithuania's application to adopt the euro in 2007,
despite having an inflation rate of only 2.7% (just 0.06% above the
reference rate) was a negative signal that, at best, a country will
need to meet the letter and last decimal place of the Maastricht
criteria to qualify." 

In a report published today, entitled "EMU Convergence Report:
2006", Fitch provides its latest assessment of when the 10 new EU
member states are likely to adopt the euro and sets out the rating
implications of their convergence path towards European Economic and
Monetary Union ("EMU"). Fitch regards the eventual adoption of the
euro as a positive factor for the external creditworthiness of these
countries that could lead to further one to two notch upgrades of
their foreign currency IDRs. 

Slovenia will become the first new member state to adopt the euro in
January 2007. Accordingly, Fitch upgraded its foreign currency IDR to
'AA'/Stable from 'AA-' (AA minus)/Positive in July. Elsewhere,
however, Estonia, Hungary, Lithuania and Poland have revised or
abandoned their official target dates over the past 12 months, and
Latvia is likely to follow shortly. Since Fitch's 2005 EMU report,
it has revised back its euro adoption forecasts for seven countries,
with an average delay of two years. The Baltic States have been the
worst affected due to an untimely inflationary shock that Fitch
expects to delay EMU until 2009-2010 for Estonia and 2010 for Latvia
('A-'(A minus)) and Lithuania ('A-' (A minus)), from 2007-2008
previously. The increase in inflation reflects both cost push factors
such as higher oil prices and some signs of overheating economies.
Nevertheless, Fitch has retained the Positive Outlook on Lithuania's
foreign currency IDR owing to its standalone fundamentals. It had
revised Latvia's Outlook to Stable from Positive last year owing to
an anticipated delay to euro adoption. 

The foreign currency IDR of Cyprus ('A+') remains on Positive
Outlook as it looks on track for EMU in 2008. Fitch has revised its
forecast for the euro adoption date of Malta ('A') to 2009 from
2008 reflecting the recent pick-up in inflation, but has maintained a
Positive Outlook on its foreign currency IDR as a potential upgrade
should be just within the Outlook horizon. Any slippage on planned
fiscal consolidation would, however, threaten the euro timetable and
the rating outlook. Fitch also views 2009 as the most likely date for
Slovakia ('A'), but uncertainty over the fiscal priorities of the
new government and the need to reduce inflation mean it remains on a
Stable Outlook. The mini-speculative currency attack against the
koruna within the ERM II in May and June highlighted the risks if
fiscal and monetary policy objectives are perceived as being
inconsistent. Fitch does not expect the Czech Republic ('A') to
adopt the euro until 2011, mainly owing to a lack of policy
aspiration exacerbated by current political uncertainties. The agency
does not expect Poland ('BBB+') to join until 2012 owing to the
challenge of reducing the budget deficit and the populist tendencies
of the governing coalition. Finally, the sheer size of the required
fiscal retrenchment makes 2014 the most likely date for Hungary
('BBB+'), despite the new government's ambitious fiscal package. 

The report will be available shortly to subscribers on the agency's
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: 

Jon Laycock
London
Tel: +44 20 7417 4327

Fitch Media Department 
Eldon House
2 Eldon Street
London, EC2M 7UA 

Fitch Press Release
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