Moody's downgrades Lithuania ratings

(VILNIUS) - International credit rating agency Moody's said on Tuesday that it had downgraded ex-communist Lithuania, citing the former European Union tiger's deep economic crisis.

Moody's said in a statement that it had cut the Baltic state's foreign and local currency ratings by one notch to Baa1 from A3, and was maintaining a negative outlook.

"The deep economic recession continues to place severe pressure on the government's fiscal metrics such that they are no longer consistent with an 'A' rating," said Kenneth Orchard, a senior Moody's analyst, in the statement.

"Moreover, the deterioration in growth prospects for Lithuania and its major European trade partners suggests that a reversal of this trend is unlikely to occur within the medium-term rating horizon," he added.

It was Lithuania's second downgrade by Moody's this year, after a cut to A3 from A2 in April, when the agency also placed the country on a negative outlook.

"The rating would likely be downgraded again if the economy continues to contract into 2010 and the budget deficit fails to narrow," Orchard said. "Alternatively, the outlook could move to stable if the economy recovers more quickly than expected, and the government is able to engineer a meaningful fiscal adjustment," he said.

The Moody's move was no surprise, observers said.

"The downgrade is obviously bad, but not unexpected, news," said Denmark's Danske Research.

Lithuanian analyst Gitanas Nauseda, of Swedish bank SEB, struck a similar tone.

"The decision itself is not unexpected. Of course, the moment of its release is bad, considering that we are now getting ready for the placement of a Eurobond issue," Nauseda said.

Lithuania, which declared independence from the crumbling Soviet Union in 1990, had enjoyed a reputation as a success story, notably since joining the EU in 2004.

The economy of this country of 3.3 million people expanded by a record 8.9 percent in 2007 after 7.8 percent in 2006. Consumption was stoked by credit, rising wages and money sent home by hundreds of thousands of Lithuanians working elsewhere in the EU, notably Britain and Ireland.

But growth slowed to 3.0 percent in 2008 as domestic demand withered in the face of rampant inflation and the deepening global crisis battered Lithuania's key export markets in the rest of the 27-nation EU as well as Russia.

Lithuanian authorities forecast the economy will contract by 19.3 percent this year -- the worst result since 1992 when the economy shrank 21.26 percent amid a post-Soviet industrial collapse.

The economy is forecast to shrink by 5.2 percent in 2010.

In the face of the crisis, Lithuania's centre-right government has raised value-added tax and slashed spending, including social security and public-sector pay, and the private sector has followed suit with wages cuts and lay-offs.