ESTONIA ON ECON CRISIS: TRUST THE FREE MARKET

C O N F I D E N T I A L SECTION 01 OF 02 TALLINN 000078

SIPDIS

STATE FOR EUR/NB
TREASURY FOR DAVID WRIGHT

E.O. 12958: DECL: 03/25/2019
TAGS: ECIN ECON EFIN EUN PREL EN
SUBJECT: ESTONIA ON ECON CRISIS: TRUST THE FREE MARKET

Classified By: Charge Karen Decker for reasons 1.4 (b) and (d)

REF A) STATE 23758
B) TALLINN 57
C) STOCKHOLM 195
D) 12/5/08 Hollister-Gilchrist e-mail


1. (C) SUMMARY: In a March 24 meeting with Econoff, Ministry of
Finance (MOF),Central Bank and MFA officials concurred with most
reftel points on the financial crisis, but noted that they do not
feel the EU needs to increase the size of its stimulus package. GOE
officials question whether the IMF fundamentally understands the
dynamics of this crisis, or if the Fund is inconsistently and
incorrectly applying the lessons of the Asian financial crisis.
Estonia remains committed to market solutions, and notes excellent
support from, and cooperation with, Swedish banks. The GOE's
timeline for Euro accession is January 1, 2011, and it is looking for
a clear signal from the EU that it believes Estonia can meet this
target. END SUMMARY


2. (C) On March 18, the Charge communicated reftel points to
Estonia's Minister of Finance Ivari Padar. Then on March 24, Econoff
had a follow-up meeting with Andres Sutt, Deputy Governor of the Bank
of Estonia (BOE),Tanel Ross, Head of International Relations for
BOE, Martin Poder, MOF's Head of EU and International Affairs, Mart
Kivine, Advisor to the Minister of Finance, and the MFA's U.S. Desk
Officer. GOE officials expressed clear support for the broad themes
(contained in Ref A) of U.S.-EU cooperation, anti-protectionism, and
the need to support both home bank headquarters as well as regional
subsidiaries (a major point of interest in Estonia where all major
banks are subsidiaries of Swedish or Danish banks). They received
our points as a welcome sign of the Administration's commitment to
working with Europe to get out of the present crisis. With respect
to these themes, GOE officials made the following points:

-- It is important that bank balance sheets be cleaned up as quickly
as possible, but also that the financial system not end up publicly
owned, especially as more countries are lining up for aid;

-- Estonia is not in a position to contribute to the expansion of the
new arrangements to borrow (NAB),as the GOE has already committed
resources to the IMF support package for Latvia. Noting that the
"greater Nordic economy" was the only major economic region of the
world left out of the G-20, Deputy BOE Governor Sutt and wondered if
repeated meetings to manage the financial crisis might in fact bring
on more instability than they solve.

-- The MOF and BOE are concerned about abrupt exchange rate swings
among EU member currencies outside the Euro zone, as this puts
additional pressure even on countries inside the Euro zone who are
less competitive.


3. (C) On regional and/or EU cooperation, and IMF involvement:

-- The group noted Estonia's excellent communication with Sweden's
Riksbank and Swedbank to give support to the Baltics. These banks,
in particular, recognize the nuances that exist among the Baltic
countries' economies (Ref C).

-- There are signs that the market is differentiating Estonia from
its neighbors, but some EU discussions of the crisis still tend to
blur the whole region together, based on the lowest common
denominator economy. More needs to be done to seek a regional
approach to the crisis.

-- Sutt remarked on the Fund's lack of consistency, noting the
markedly different conditions applied to Latvia compared with
Belarus. He also noted Lithuania's concern that seeking an IMF
package could signal insolvency, when its real problem is liquidity.


4. (C) On fiscal stimulus:

-- All agreed that the current EU approach contains sufficient
nuance. The GOE does not believe a traditional Keynesian approach of
countries spending their way out of the crisis will work for the
small, open, newer EU economies.

-- Overall, they feel the EU has allocated the right amount of
stimulus. Kivine of MOF commented that Estonia, for example, cannot
afford to spend its way into an 11 percent of GDP budget deficit the
way Euro zone member Ireland has.


5. (C) On Estonia's path to Euro accession:

-- Kivine and Sutt both downplayed PM Ansip's recent statements in
Brussels that Estonia could be ready to adopt the Euro as early as

2010. Kivine said this idea was "just being played with" and that
recent press reports of the European Central Bank's displeasure with
the GOE were "blown out of proportion." The GOE does not expect Euro

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accession before January 1, 2011 and "there is no discord on this,"
Kivine said. Sutt added that accession 4-6 months earlier would not
make a difference. More important, he said, is that Estonia get a
clear signal soon from the European Central Bank (ECB) and the
European Commission that they believe Estonia can meet the Maastricht
criteria for accession by 2011.


6. (C) COMMENT: Throughout the meeting, there were signs of some
fatigue with the ongoing focus on Central and Eastern Europe. Sutt
and Kivine touched on previous critiques (Ref D) that the IMF seems
stuck with an "Asian model" focused on exports, savings and current
account surpluses. He also wondered whether IMF staff grasp the
fundamental differences between the Asian crisis and the current one.
The group noted they see this crisis as one that began in mature
economies, driven by huge imbalances, which must be corrected. They
acknowledged that in this climate, states with weaker fundamentals
are at risk. Within the EU, the GOE will continue to stress faith in
the free market - as much as possible - to resolve the current
crisis.

DECKER