Latvia’s slide adds to gloom in Baltics

Robert Anderson
November 8 2008
Financial Times

The Baltic states are sliding into a deep recession, new figures indicated yesterday as Moody’s cut its credit ratings for Latvia, the most exposed of the three to the global financial crisis.

The Latvian economy – in technical recession since the start of this year – contracted by a much higher-than-expected 4.2 per cent year-on-year in the third quarter, the country’s statistics office estimated.

The rating agency downgraded Latvia’s foreign and local currency ratings one notch to A3 and placed neighbouring Estonia and Lithuania alongside Latvia, because of negative outlook as the global liquidity crisis worsens.

“Latvia’s status as a large net importer of capital leaves the country particularly exposed to liquidity problems in the international financial markets,” said Kenneth Orchard, sovereign risk senior analyst at Moody’s.

This double blow will raise fears that the Baltic states face such a severe economic slowdown that they will be forced to join Hungary and appeal to the European Union and International Monetary Fund for help.

Estonia has also been in technical recession in the first half of this year and Lithuania could join them in 2009. If Latvia – which has the worst external imbalances – is forced to seek help, Lithuania and Estonia are almost bound to follow. * Moody’s also cut Hungary’s sovereign credit ratings one notch from A2 to A3 yesterday, citing deterioration of global market conditions and possible limits on its access to international funding. The outlook on the new credit rating was also negative, Moody’s said, prompting a fresh wobble for Hungary’s forint and adding to woes for the EU’s only economy so far to seek IMF aid in the credit crisis.