Latvia’s economic outlook has taken another blow after ratings service Standard & Poor’s dropped the country’s creditworthiness to “junk” status.

The Feb. 24 decision to lower Latvia’s credit rating to “BB+/B” means foreign investors may become more skittish about putting their money into the Baltic economy.

Latvia becomes the second new European Union member state after Romania to be dropped to “junk” status.

“The downgrade of Latvia reflects what we consider is a worsening external outlook and the associated implementation risks on the government’s ambitious economic program,” Standard & Poor’s London-based credit analyst Eileen Zhang said in a press release. The ratings service foresees Latvia’s economy continuing to struggle for several years.

In Rīga, a Ministry of Finance spokesperson acknowledged the downgrade by Standard & Poor’s, but said the lower rating will not affect Latvia’s economic stabilization program or the EUR 7.5 billion in loans the country has arranged with the World Bank, the International Monetary Fund, the EU, the European Bank for Reconstruction and Development, and several European nations.

The spokesperson, in a Feb. 24 press release, noted that Fitch Ratings, Moody’s Investors Service and Japan’s R&I were not following Standard & Poor’s in downgrading Latvia’s ability to repay debt. Fitch and Moody’s, however, had already joined Standard & Poor’s in November in lowering Latvia’s rating to just above “junk.”

In Copenhagen, analysts for Danske Bank—which in November had warned that Latvia’s creditworthiness could drop further—said the move by Standard & Poor’s was not surprising.

“The downgrade is obviously bad news, but not unexpected given the freefall in growth and political instability in the country,” they said in a Feb. 24 press release.

Once one of Europe’s fastest growing economies, Latvia has seen a major bank taken over by the government, rising unemployment, continued public unhappiness with the Saeima and—just last week—the collapse of its center-right coalition government led by Prime Minister Ivars Godmanis.

“The rating agencies are deeply concerned about the current status of the Latvian economy,” the Danske Bank analysts said. “They cannot rule out the possibility of more downgrades in the future if the new government delays responding to the problems. On the other hand, if confidence in the Latvian financial system and the whole economy is restored, then the ratings could stabilize at the current level.”

The next head of Latvia’s government might be a former finance minister, the current minister for regional development or a longtime member of the Saeima, if one of three political parties gets its way.

President Valdis Zatlers, who will have to nominate the next prime minister, was scheduled to have a series of meetings Feb. 24 with representatives from several political parties. Meanwhile, three parties already have put forward the names of whom they would like to replace Ivars Godmanis, who resigned Feb. 20.

The conservative People’s Party (Tautas partija), which has the largest representation in the Saeima, wants Edgars Zalāns to become prime minister. Zalāns, 41, is a member of the People’s Party board of directors and is the current minister of regional development and local government. The party announced Zalāns as its choice on Feb. 22.

The People’s Party, one of four parties in the current coalition government, joined with the Union of Greens and Farmers (Zaļo un Zemnieku savienība) to pressure Godmanis to step down. Godmanis is a member of Latvia’s Way (Latvijas ceļš), which is partnered with the First Party of Latvia (Latvijas Pirmā partija).

Conservative opposition party New Era (Jaunais laiks) announced Feb. 23 that it wants Valdis Dombrovskis to lead the new government. Dombrovskis, 37, is a former finance minister and currently is a member of the European Parliament. New Era has twice before nominated him to be prime minister, in 2006 and 2007.

Dombrovskis’ candidacy is supported by the Civic Union (Pilsoniskā savienība), a breakaway conservative party led by former foreign minister Sandra Kalniete and former interior and defense minister Ģirts Valdis Kristovskis.

The socialdemocratic Harmony Centre (Saskaņas centrs), meanwhile, has told the president that the next prime minister needs to be nonpartisan or come from its ranks—namely 49-year-old Jānis Urbanovičs, chair of the party’s parliamentary caucus. Urbanovičs has served in every Saeima since the restoration of Latvian independence. Representatives of Harmony Centre met with the president on Feb. 23, according to a press release from the party.

After a last-minute meeting with Latvia’s president, Prime Minister Ivars Godmanis announced Feb. 20 that he is stepping down.

In a press briefing following the short afternoon meeting, President Valdis Zatlers said he had accepted the prime minister’s resignation and will begin discussions Feb. 23 on choosing someone new to lead the government.

The prime minister’s decision came hours after leaders of two coalition partners, the People’s Party (Tautas partija) and the Union of Greens and Farmers (Zaļo un zemnieku savienība, or ZZS), told Zatlers that the government could not continue with its current makeup.

The prime minister will continue to govern until Zatlers invites a new prime minister and he or she is approved by the Saeima.

The prime minister said through a spokesman that he was ready to continue serving as long as necessary to protect his successor from assaults by the public and the mass media in the face of Latvia’s worsening economy and the need to fulfill obligations to international financial institutions.

Godmanis, a member of the First Party of Latvia / Latvia’s Way (Latvijas Pirmā partija / Latvijas ceļš), became prime minister in December 2007.

Godmanis survived a Feb. 4 parliamentary vote of no confidence that had been initiated by the opposition New Era (Jaunais laiks) party. But he irked the president the following week when the Cabinet of Ministers decided not to approve a government reorganization plan that Godmanis had promised to deliver. On hearing of the decision, Zatlers on Feb. 13 issued a statement saying he had lost confidence in the prime minister. However, following a Feb. 16 meeting with Godmanis, the two appeared to have resolved their differences.

Calls for the government to step down have been heard from different corners during the past several months as Latvia’s economy, once one of the fastest growing in Europe, began to collapse late last year.

New Era on Feb. 20 called on all parties in the Saeima, except for the pro-Moscow party For Human Rights in a United Latvia (Par cilvēka tiesībām vienotā Latvijā, or PCTVL), to talks on forming a new government.

“Parties represented in the Saeima finally have to understand their responsiblity before the voters, have to stop bickering about unimportant things and must unite for common work,” New Era Chair Solvita Āboliņa said in a press release.

Likewise, the People’s Party and ZZS announced they are ready to work on forming a new government, but also without PCTVL.