Aug 11, 2009
Latvia’s 4th rating cut
S&P said it was cutting Latvia’s sovereign rating a notch deeper into junk status from BB+ to BB, citing the “political and economic challenges” facing the country as a result of “rapidly contracting” incomes and the associated pressure on public finances.
Latvia posted real GDP contraction of 19.6% in the second quarter of 2009. That’s the deepest fall in the country’s history. Meanwhile, foreign government debt increased to LVL 3.2bn (EUR 4.6bn). As a result, gross government domestic debt to GDP is set around 20%. To fulfill Maastricht criteria, the ratio can not break 60%. However, it’s not easy any more.
Latvia's Real GDP touching the floor
Retail sales fell 28%, meaning the most necessary products are becoming less available due to lack of real money. By a third! Industrial production is 19% lower, indicating long-term projected economic decline. Earnings in restaurant and hotel sector, which Riga was famous for, plunged 35%! You will not see British stag-parties on the capital streets anymore.
In the best case scenario, Latvia’s economy is expected to shrink 20% this year and somewhat 3% next year. (3% is a nice assumption given deflation path over devaluation and still rising consumer prices, but that’s another topic) Neglecting budget deficit and resulting debt build up, but only assuming EUR 7.5bn in loans from IMF, Latvia’s debt to GDP ratio will blow up to 60% by the end of 2010. So even under the most optimistic government scenario, the country meets the lowest end of Maastricht criteria to adopt Euro. Too bad.
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