LONDON - Fitch Ratings placed Estonia's rating on positive watch Tuesday and indicated it would upgrade the Baltic nation if its bid to adopt the euro is formally accepted this summer.
"Euro membership would significantly reduce risks associated with the country's high levels of external debt and foreign exchange domestic lending, and would provide an exit to its currency board arrangement," said Douglas Renwick, an associate director in Fitch's Sovereigns group.
Estonia's currency-board system keeps the kroon pegged to the euro.
Fitch currently gives Estonia a long-term foreign currency Issuer Default Rating of BBB+.
The rating agency sees a "high likelihood" of Estonia adopting the euro in January 2011 and "formal approval of Estonia's bid to adopt the euro this summer would lead to a rating upgrade," Fitch's Renwick added.
Earlier this month, data from the finance ministry showed that Estonia's general government budget deficit narrowed to 1.7% of gross domestic product in 2009--clearly below the 3%-of-GDP threshold set by the European Union.
Reducing the budget deficit below 3% of GDP was Estonia's last hurdle in qualifying for adoption of the European Union's single currency.
By Art Patnaude, Dow Jones Newswires; +44 (0) 207 842 9259; email@example.com (Clare Connaghan contributed to this article.)