On target - but behind the pack
The international agency believes it is possible for the country to meet its 2009 euro entry target after making headway in terms of inflation, bond yields and public finances.
However, meeting the deadline would require a clear policy commitment and rapid fiscal adjustment by the next government after elections in September, so that Fitch views 2010 as a more likely and central forecast.
The organization says Hungary has also seen a marked decline in inflation and bond yields over the past 12 months. However, fiscal targets continue to slip such that Fitch views 2011 as a more realistic euro adoption date than the government's 2010 target. Meanwhile, Fitch assesses the Czech Republic's chances of joining the euro in 2010 as about even. It also requires difficult public finance reforms as well as a clear commitment to the goal of 2010 entry.
Top of the euro-pile, according to Fitch, are Estonia, Lithuania and Slovenia, which it expects to meet the Maastricht criteria in mid-2006 and become the first of the 10 new European Union member states to join the euro area in January 2007. However, the risk of a delay to the euro-adoption timetable of these front-runners, as well as Latvia, has risen somewhat over the past 12 months mainly owing to an increase in inflationary pressures.
"In some respects there has been a 'de-convergence' over the past 12 months in that a majority of countries met fewer of the Maastricht criteria in mid-2005 than in mid-2004," says Edward Parker, senior director in Fitch's sovereign group.
"The main problem has been with meeting the inflation criterion, as low inflation rates in some EU countries have dragged down the reference rate. The challenge is particularly acute for the Baltic states where inflation has increased owing to rising cost pressures from oil prices, indirect tax and administered price hikes, and strong underlying pressures from rapid GDP, wage and credit growth as their economies continue to catch up with 'Old Europe', while their exchange rates are tightly pegged to the euro," Parker added.
In a report entitled 'EMU Convergence Report: 2005', Fitch provides its latest assessment of when the 10 countries that joined the EU in 2004 are likely to join the European Exchange Rate Mechanism (ERM) II and adopt the euro, and sets out the rating implications of their convergence path towards the European Economic and Monetary Union (EMU).
Fitch regards the eventual adoption of the euro as a positive factor for the external creditworthiness of the new EU member states that could lead to further one to two notch upgrades of their long-term foreign currency ratings over the coming years.
