Another day, another sovereign downgrade. Two this time actually, one for Lithuania and one for Latvia; both from Moody’s.
Here are the statements (our emphasis):
London, 23 April 2009 — Moody’s Investors Service has today downgraded the foreign and local currency ratings of the Government of Lithuania to A3 from A2. The outlook is negative. At the same time, Moody’s downgraded the government’s short-term rating to P-2 from P-1. These rating actions conclude the review for possible downgrade that was initiated on 10 February 2009.
Today’s downgrade was prompted by the ongoing deterioration in economic activity that is expected to increase pressure on the government’s liquidity position in the second half of 2009. “The sharp real contraction of the economy, which could be over 10% in 2009, is causing a decline in government revenues and enlarging the budget deficit,” says Kenneth Orchard, Vice President-Senior Analyst in Moody’s Sovereign Risk Group. “At the same time, the government’s ability to borrow on the public capital markets is constrained.” Moody’s recognises that the interplay between the economy and fiscal policy will be important over the next few years.
Tighter fiscal policy would be painful, but could support investor and consumer confidence and allow for euro adoption as early as 2011, thereby relieving one source of pressure. Moody’s notes that the government recently passed amendments that should reduce the budget deficit in 2009 to bring it more in line with the Maastricht criterion. “The government has demonstrated a strong commitment to maintaining the budget deficit below 3% of GDP, but Moody’s is concerned that the necessary cuts may not be politically or socially acceptable if the economy weakens further,” says Mr. Orchard.
And on Latvia:
London, 23 April 2009 — Moody’s Investors Service has today downgraded the foreign and local currency ratings of the Government of Latvia to Baa3 from Baa1. The outlook on the ratings remains negative. “The depth and pace of the economic adjustment is much more severe than previously anticipated,” says Kenneth Orchard, Vice President-Senior Analyst in Moody’s Sovereign Risk Group. “This has had negative repercussions for government revenues and the budget deficit, causing the budget-related conditions in the IMF stand-by arrangement to be missed.” The Latvian government now forecasts that its economy could contract by 12%-13% in 2009, which will result in significant declines in incomes, profits and consumption that are unlikely to recover in the near term.
As a result, the government is being forced to undertake large and painful cutbacks in spending. Moody’s highlights that reduced revenues, problems in the locally-owned portion of the banking sector and limited financing options in the international and domestic capital markets have placed the government’s liquidity under duress. It is therefore essential that the government identify sufficient budget adjustments to maintain access to IMF/EU funding.
“The new government must carefully craft fiscal policy to meet several important but conflicting objectives,” emphasises Mr. Orchard. “Delaying expenditure cuts could damage investor confidence and risk the goal of euro adoption in 2012. Conversely, poorly-targeted cuts may not be politically or socially sustainable, and could exacerbate the already large recession.”
Estonia’s rating meanwhile is confirmed at A1, although the rating outlook was changed to negative. As Moody’s states:
“Moody’s has concluded that the Estonian government’s creditworthiness is likely to remain resilient in the face of a deep and potentially prolonged recession,” says Kenneth Orchard, Vice President-Senior Analyst in Moody’s Sovereign Risk Group. “The government is working to keep the budget deficit under control, liquidity is secure and the government is relatively well isolated from problems in the banking sector.”
Disciplined fiscal policy during the boom years, plus an impressive fiscal adjustment in reaction to the current circumstances,mean that the budget deficit is likely to remain within the 3% of GDP Maastricht threshold in 2009. This performance — one of the best in the EU – should permit Estonia to exercise its “exit strategy” and officially adopt the euro in January 2011. Moody’s views entry into the Eurozone as positive for Estonia’s creditworthiness. “Euro adoption would eliminate currency risk as well as boost economic confidence by positively differentiating Estonia from other countries in the region,” says Mr. Orchard.
We wonder if the reference on Maastricht quid pro quo actually means Estonia is in a better economic position than the UK?
Related links:
UK, the economic iconoclast – FT Alphaville
Breaking the rules – FT Alphaville
Not so Maastricht – FT