Confidence in the Latvian economy has taken another hit with the decision by financial services company Standard & Poor’s to cut its rating of the country’s willingness and ability to pay debts.

The company’s London-based ratings service on Oct. 27 also lowered its evaluation of Lithuania but left Estonia’s unchanged, adding that the outlook for all three Baltic countries is negative.

The action by Standard & Poor’s follows similar recent decisions by Fitch Ratings and Moody’s Investors Service.

“Our decision to lower the ratings reflects the increased risks that the Latvian government will have to support domestically owned banks under a worsening credit environment,” Eileen Zhang, a Standard & Poor’s credit analyst, said in a press release. “The uncertainty surrounding these banks’ liquidity needs, refinancing capacity, and worsening credit quality increases the external vulnerabilities of the Latvian economy.”

The ratings service dropped its assessment of Latvia’s long- and short-term foreign and local currency ratings to “BBB/A-3” from “BBB+/A-2.”

Latvia’s government has been struggling with a tightening economy, which has put pressure on the national budget. The Cabinet of Ministers on Oct. 7 signed off on a proposed 2009 budget that foresees nearly LVL 5.8 billion in spending, but revenues of only LVL 5.4 billion. The budget has yet to be approved by the Saeima.

Standard & Poor’s warned that things could get worse if the Latvian government were to take on debt to support one or more banks, if the exchange rate of the lat slips or if the economy contracts faster than expected.

On the other hand, the ratings service said, if demand for Latvian exports were to increase—thereby reducing trade imbalances and taking pressure off banks—Standard & Poor’s could revise its outlook upward.

Standard & Poor’s also cut the City of Rīga’s rating to negative from stable.