Fitch Ratings has become the second service to cut Latvia’s credit rating to “junk” status, but the country’s finance minister says the decision will not affect its economic stabilization plan.
The London-based ratings service on April 8 cut Latvia’s long-term credit rating to BB+ from BBB-. Fitch also downgraded its ratings for Estonia and Lithuania, warning that their economic ties to Latvia will put them under more pressure.
In February, the ratings service Standard & Poor took similar action on Latvia, making it the second European Union country after Romania to fall to junk status.
The downgrade for Latvia comes as the country’s new government has been working to shore up loans arranged late last year with the International Monetary Fund and the European Union.
“The downgrade of Latvia’s ratings reflects the deterioration in the prospects for the Latvian economy and elevated risk of policy slippage since the agreement of the EUR 7.5 billion loan package with the IMF, EU and other international lenders in December 2008,” the ratings service said in a press release.
Fitch has forecast Latvia’s economy will shrink by 12 percent this year, much more than the 5 percent contraction the Latvian government used in approving its current budget.
A delay by the Latvian government in submitting a revised austerity budget, Fitch said, may force the IMF and EU to hold back on the loans. The ratings service also warned that the risk of devaluation of the national currency, the lat, has increased and would be a “severely negative” scenario.
Finance Minister Einars Repše said in a press release that Latvia’s negotiations with international lenders will continue as it works to stabilize the economy. However, the ministry acknowledged that the downgrade is a blow to the country, which generally has had a credit rating favorable to foreign investment.
Fitch followed its announcement on the Baltic states with action April 9 on several banks. In Latvia, SEB Banka, Swedbank and Latvijas Krajbanka all have had their ratings lowered.
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