Mike Collier in Riga -

Estonia's markets, already jittery from devaluation rumours and the release of a downbeat Citibank report on the economy, are being further rattled by calls from within the ruling coalition to replace Economics Minister Juhan Parts. With many economic challenges ahead for Estonia, political crisis would be an unwelcome development.

Parts appears to be caught in the crossfire as tensions rise between his own party Pro Patria and Res Publica Union (IRL) and its coalition partner, the Reform Party of Prime Minister Andrus Ansip.

Parts and Ansip have a longstanding rivalry, but in recent months they have been able to work together for the sake of economic and political stability. Both have occupied the positions of prime minister and economics minister in coalition governments. However, their relationship now appears to be crumbling.

In remarks made to the AFP news agency on November 21, Parts broke ranks, blaming Ansip's previous government for failing to pave the way for euro adoption. "Estonia had a chance to speed up joining the Eurozone under the last government, which led the country when inflation was much lower than now," Parts said.

Ansip's coalition had been "too worried about its reputation and instead of making accession to the Eurozone its priority, and took misplaced steps such as too rapid an increase in state sector salaries," he claimed. "Now, when inflation has racked up, accession to the Eurozone is postponed for years."

"With the current decrease of GDP and increase of inflation it is impossible to predict when Estonia will be ready again to join the Eurozone," Parts said, adding he was, nonetheless, an "optimist" regarding eventual accession.

Estonia hoped to make the switch from the kroon to the euro at the start of 2007. In April 2006, the government shifted the target to 2008 and has now put the move on ice until 2011 at the earliest. The delays have mainly been caused by Estonia's failure to control rising inflation, which needs to be strictly regulated in order to meet the EU's convergence criteria.

Parts' thinly-veiled attack on his boss seems to have been the last straw for some Reform Party politicians who are now calling for him to be replaced, according to reports in the Eesti Paevaleht newspaper.

A call to spare Parts

The reasons cited by the unnamed politicians are Parts' €2.56m plan to increase state subsidies for public transport and his proposal that the renovation of the Tallinn-Tartu highway should be financed with money from the state reserve. Both ideas are viewed by the Reform Party as unacceptable and, according to Eesti Paevaleht, PM Ansip is among those willing to block Parts' proposals.

Ansip has admitted to a difference of opinion, but said it was a small matter, insisting: "We don't have a quarrel with Parts." However, such lukewarm backing is a bit like the traditional vote of confidence in the manager from the board of a struggling football club. The rift has become serious enough to prompt another former prime minister, and current leader of IRL, Mart Laar, to send a letter to Ansip in which he attempted to defuse tensions by warning against overreactions.

The Tallinn stock exchange is already jumpy in the wake of Finnish press-inspired devaluation rumours and the release of a downbeat Citibank report on the Estonian economy. A rift in government would only add to the feeling that something is about to happen - even if no one is quite sure what.

"There is a lot of discussion about potential devaluation at the moment and the market reacts without thinking about how big exactly the probability of this scenario is," Hansapank analyst Sander Danil tells bne. "We still believe that the probability of a devaluation is still rather low - close to zero in fact."

"Locals are quite calm, but it seems to be foreign analysts and some fund managers are quite nervous. Discussion is quite emotional. It seems to be not very rational. Belief [in devaluation] is bigger than the actual situation," he says.

With regard to the Parts situation, Danil said the dispute was over one particular issue and not the economy in general. "I haven't heard any calls for the minister to resign because of the economic situation or potential devaluation. In economic circles his image is quite respectable at the moment."

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