Analysts for Denmark’s influential Danske Bank say they would not be surprised to see Latvia’s credit rating slip to “junk” status as the economic news out of Rīga continues to worsen.
A day after rating agency Standard & Poor’s again downgraded Latvia’s long-term foreign currency rating, Danske Research analysts announced on Nov. 11 that “it is now very clear that the rating agencies are deeply concerned about the state of the Latvian economy—as are we.”
Wrote Copenhagen-based analysts Lars Christensen and Violeta Klyviene: “We would not rule out that Latvia could be downgraded to ‘junk’ status in the near future—as we have recently seen with the rating of Romania.” Standard & Poor’s as well as Fitch Ratings have pegged Romania as below investment grade, which may deter foreign capital from flowing into the country.
Standard & Poor’s cut its rating of Latvian currency just two days after Prime Minister Ivars Godmanis announced the takeover of the country’s No. 2 commercial bank, Parex banka. Just a week earlier, the rating agency had already downgraded its assessment of Latvia’s ability to pay debts. Moody’s Investors Service, another rating agency, also cut its opinion of Latvia.
“The downgrade is obviously bad news, but not unexpected given the high level of leverage and continued large imbalances in the Latvian economy and the sharp deceleration in growth,” the Danske Research analysts wrote. “The nationalization of Parex bank undoubtedly is also weighing on Latvia’s ratings.”
The analysts also noted that the slowdown in the economy “is having a significant negative impact on public finances in Latvia.”
New York- and London-based Fitch Ratings, agreed. On the same day that Danske Research issued its latest analysis of Latvia, Fitch dropped Latvia’s foreign currency ratings and placed the country’s outlook as negative.
The decision, the rating service’s Eral Yilmaz said in a press release, “reflects Fitch’s view that in the absence of substantial and timely international financial support, Latvia faces the likelihood of a severe financial and economic crisis and a further downgrade of its ratings.”
Reacting to the recent ratings downgrades, Latvian Finance Minister Atis Slakteris said in a Nov. 11 press release that they must be viewed without exaggeration. Foreign investors, he said, view decisions like the takeoever of Parex in a wider context and remain positive about Latvia.
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