Bloomberg.com
Laura Cochrane
November 12, 2008
Nov. 12 (Bloomberg) — Baltic stocks fell after Latvia was downgraded by Fitch Ratings for the third time since August on concern the country will need an international bailout or face a “severe” crisis.
Fitch cut Latvia to the lowest investment-grade rating of BBB- and signaled it may reduce again to the category of high- risk, high-yield or junk. The OMX Riga Index dropped 4.2 percent while the cost to protect against a default by Latvia rose to the highest this month, credit-default swaps show.
“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,” Eral Yilmaz, associate director for Fitch’s sovereigns group in London, said in a statement late yesterday.
Latvia’s economy shrank by 4.2 percent in the three months to September compared with a year earlier. The Baltic countries are “vulnerable” to a deeper recession than other emerging economies because their currencies are pegged, preventing exchange-rate declines that could help boost exports, said Beat Siegenthaler, chief strategist for emerging markets at TD Securities Ltd in London.
“The external imbalances have to be corrected somehow and it can’t go through the currencies, so it has to go through the economy,” Siegenthaler said.
The OMX Vilinius Index in Lithuania fell 4.8 percent to its lowest more than four years, while Estonia’s OMX Tallinn index fell as much as 2.2 percent.
The cost of protecting against a default by Latvia rose to 7.85 percent of the debt insured from 7.42 percent, according to CMA Datavision in London.
Credit-default swaps, conceived to protect investors against a default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deteriorating perceptions of credit quality.