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Moody's downgrades Latvia to Baa1; outlook remains negative

Moody's Investors Service has downgraded the foreign and local currency ratings of the Government of  Latvia to Baa1 from A3. The outlook on the ratings remains negative.

“The downgrade reflects the further intensification of the economic adjustment in Latvia since October 2008,” says Kenneth Orchard, Vice-President/Senior Analyst in Moody's Sovereign Risk Group. “The economic downturn is now expected to be deeper and more prolonged than previously assumed. Government borrowing will rise significantly over the next few years to smooth the adjustment and prevent a major economic crisis, resulting in a deterioration of the government's credit metrics relative to its peers.”

The outlook on the ratings remains negative. Moody's recognizes that the cost of the economic stabilization, which will be borne by the Latvian government, will be high. In addition to running rather large budget deficits, the government will probably need to provide additional support to the banking system. Moody's is maintaining the negative outlook due to the risks associated with the government's economic program. Given that private sector debt levels are relatively high, the planned measures could seriously inhibit an economic recovery; indeed, confidence in the banking system and currency peg could decline. Such a scenario would be likely if the regional economy and global financial system fail to recover in a timely manner. (press release)