Estonia needs to cut state spending by 30% or face "bankruptcy", news service Bloomberg quoted Erkki Raasuke, the head of Swedbank AB's Baltic unit.
Devaluing the kroon is one way to achieve the cost cuts and it should be chosen "at once if we have doubts about whether we have the discipline" to trim spending, Raasuke said in an interview with Eesti Paeevaleht on Thursday. Kristi Kunnapas, a spokeswoman for Swedbank, confirmed his comments by phone in Estonia's capital Tallinn.
The global credit freeze and faltering domestic demand pushed Estonia and neighboring Latvia into the European Union's deepest recession. The government and the central bank have so far ruled out a currency devaluation as unjustified by economic conditions, writes LETA.
"The third and clearly the worst option is if we lie to ourselves and say we have the discipline and choose the way of deflation," Raasuke said. "Then we follow this path for the next one and a half years and then admit than we didn't have enough discipline."
Latvia last month agreed to a loan of 7.5 billion euros from a group led by the International Monetary Fund, while the Washington-based lender said last month that Estonia's government reserves should help it avoid seeking international assistance.
Estonia has reserves of about 19 billion kroons, or about 8% of the gross domestic product (GDP), the Finance Ministry spokeswoman Kristi Joesaar said yesterday.
The opposition has said the reserves may not last until the end of the year after December tax receipts trailed the Finance Ministry's estimates by one billion kroons.
"Estonia's goal is to re-establish a competitive economy, and it essentially doesn't matter whether we do it by devaluing or by cutting price and salary levels," said Heido Vitsur, an analyst with the government-owned Estonian Development Fund, a government-owned investment fund. "If we don't choose one of them, we will have to do the other."
The country may be forced to seek the IMF's help in the second half of the year unless it cuts public wages by as much as 15%, Indrek Neivelt, the predecessor of Raasuke, said earlier this month.
The government needs to agree on spending cuts of at least 8 billion kroons, or about 8% of the budget, within two weeks "or become IMF's bond slaves like our neighbors," former Prime Minister Mart Laar said earlier this week.
The Finance Ministry is preparing proposals for budget spending cuts so the government can approve them within two weeks, Finance Minister Ivari Padar said on Wednesday.