The six countries have overheating economies, unsustainable credit growth and high inflation, and they have postponed euro adoption, raising the risk of ratings or outlook changes, Lars Christensen, a senior analyst at A/S Danske Bank, the Nordic region's second-largest lender, said today in a report „New Europe: Mind the ratings.” High inflation, asset bubbles built on quick credit growth and fast economic expansion may leave countries in eastern Europe vulnerable to economic declines should financing slow as the European Central Bank tightens monetary policy, Danske said. A ratings downgrade could reduce investor confidence in these countries. „Our models indicate that the countries which are most fragile to negative rating actions are to a large extent the same countries that are likely to face a hard landing in the economy and possibly also financial distress,” Christensen said.
Latvia, the fastest growing economy in the European Union, may face a cut from all three credit agencies. Fitch and S&P may lower Latvia's sovereign debt rating to BBB+ from A-, Danske said. Moody's may reduce the Baltic country's outlook to negative from positive. „Latvia stands out, and our analysis clearly shows that the risk of downgrades of Latvia's sovereign debt is substantial,” the report said. S&P cut Latvia's outlook to negative February 19, saying the country risked a „hard landing.” Danske Bank said the scrutiny of Latvia's external imbalances brought attention to the rest of Eastern Europe.
The Slovak economy is showing „clear signs of overheating” and a possible delay in euro adoption may trigger all three rating companies to change outlooks from stable to negative, Danske said. The ratings companies seem to be „a bit too optimistic about Slovak euro adoption in 2009,” the report said.
Moody's and Fitch may lower the outlook for Lithuania to negative from stable, and for Estonia the assessment may fall to stable from positive, according to Danske Bank's models.
Bulgaria and Romania have been rated „too generously” since the two countries joined the European Union in 2007, Danske Bank said. Rising external imbalances and increasing loan growth could lead to a cut in the outlook for the two countries. Bulgaria could be lowered to negative from stable by S&P and Fitch, the report said. Romania could see a reduction to negative from stable by Moody's and the credit rating may be cut to BBB- from BBB by Fitch, it said.
Only the Czech Republic and Hungary may expect positive actions from the rating companies, Danske Bank said. Fitch may raise the outlook for the Czech Republic to positive, while S&P may raise the ratings a level higher. Hungary may see rating outlooks raised by both S&P and Fitch, the report said.