(RIGA) - The London-based rating agency Fitch on Friday downgraded European Union members Estonia, Latvia and Lithuania and maintained a negative outlook, citing large current account deficits.

"The downgrade of the Baltic states reflects the risk that the deterioration in the European economic and financial environment will impose a more costly macroeconomic adjustment in the Baltic countries, given their large bank-financed current account deficits," Edward Parker, Head of Emerging Europe sovereigns at Fitch, said in a press release.

Fitch downgraded Estonia from A to A-, Latvia's rating dropped from BBB+ to BBB, while Lithuania went from A to A-. The outlook for all three remained negative.

Having enjoyed double-digit economic growth in recent years, Estonia and Latvia have fallen into recession. While it expects positive GDP growth this year, Lithuania is struggling with high inflation.

"Real GDP contracted in (first half) 2008 (on a quarter-on-quarter seasonally adjusted basis) in Estonia and Latvia, meaning they are in recession. This represents a 'hard landing' from year-on-year GDP growth of 8.1 percent and 11.6 percent respectively, in (first half) 2007," according to Fitch.

"In Lithuania, the slowdown, like the preceding economic boom and imbalances, is less marked, but GDP growth still slowed to an annualised 2.4 percent in (first half) 2008, from 8.8 percent in 2007," the rating agency observes.

Fitch warned that the "risk of a prolonged and deep recession cannot be wholly discounted, increasing the potential for adverse economic and fiscal shocks."

Responding to the Fitch downgrade, Latvia's Finance Minister Atis Slakteris said Friday the country's center-right government would have to maintain the projected budget deficit for 2009 at 1.85 percent of the gross domestic product to help engineer a recovery.

He also pointed to global factors in Latvia's economic woes. "Latvia and the Baltic states are not isolated from what is happening in the US and elsewhere," Slakteris said.

Contacted by AFP, a spokeswoman for Lithuania's finance ministry noted that at A-, the country's rating remained extremely high and was still close to the 'most credible' indication that Fitch gives for investors.

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