2013-10-25
Financial market participants beginning to assess the increasing probability of the adoption of the euro
Lithuania’s objective to adopt the euro from 2015 and its possibilities to implement this objective are already being assessed by global financial market participants. The international rating agency Standard & Poor’s on Friday upgraded Lithuania’s credit rating perspective from stable to positive, specifying, as one of the reasons for this action, the increasing probability for this country to become a Member State of the euro area in the scheduled time.
Positive perspective means a one-third probability that in the next 24 months the country’s credit rating can be upgraded. Currently Standard & Poor’s has assigned for Lithuania the long-term credit rating BBB.
The agency also noted that reasonable use of EU support during the crisis helped create a fiscal and balance of payments buffer. Moreover, the supervisory institutions have effectively and in a timely manner managed the bankruptcy processes of Snoras and Ūkio bankas, thereby preventing from the financial problems spilling over to the economy and the public sector.
According to Standard & Poor’s analysts, the Lithuanian economy will continue growing and inflation will remain moderate; therefore, there increases the probability that the country will comply with the euro adoption criteria and become the nineteenth Member State of the euro area in 2015. Fiscal discipline, further economic growth and the adoption of the euro — these are the conditions due to which the country’s rating is being upgraded.
“The economists of the Bank of Lithuania, who recently presented a quantitative assessment of the impact of the adoption of the euro on the national economy, noted that major credit rating agencies see the euro adoption as a factor mitigating credit risk. In addition, the examples of Estonia and Latvia show that ratings can be upgraded prior to the euro adoption; this, however, requires maintaining a sustainable public finances policy,” says Rūta Rodzko, Director of the Economics and Financial Stability Service of the Bank of Lithuania.
The research of the Bank of Lithuania revealed that upgrading of the ratings would enable the country to borrow at a lower cost. Under the baseline assessment scenario, the average rate on government securities in the year of the euro adoption would decrease by 0.80 percentage points; the borrowing cost for the population and business would be 0.49 to 0.56 percentage points lower than if the euro would not be adopted.
Lower interest rates would allow saving LTL 2.0–3.9 billion in interest expenses in the medium term (2015–2022). The population and business would enjoy most of the benefits (LTL 1.6–2.3 billion), the remaining portion (LTL 0.4–1.6 billion) would be saved by the state budget due to a decline in the debt management costs.