RIGA - The leading ratings agency Standard & Poor's issued a report on Sept. 3 putting Latvia at the top of European countries most vulnerable if the current credit crunch were to spread and intensify.
The ranking, which deals another blow to Latvia's international investment repute, is based on the so-called liquidity vulnerability index, which Standard & Poor's developed to assess countries' ability to resist the current malaise on international markets after the recent subprime meltdown.
"With the retrenchment and reassessment of risk that's ongoing, we can already see that credit default swaps are widening," Standard & Poor's credit analyst Moritz Kraemer was quoted as saying.
"Investors are now interested in asking which countries are more vulnerable to a hostile environment," he said.
Regarding Latvia, where economic growth is over 11 percent annual and inflation is almost 10 percent, Kraemer told The Times of London that the Baltic state fits the age-old adage: "It's not the speed that kills, it's the sudden stop."
Investors, particularly in the real estate market, could pull out of the country in large enough numbers that the national currency, the lat, comes under extreme pressure.
To be sure, Latvia's top position in the index does not denote a further lowering in its sovereign ranking.
"We have not, to date, changed any ratings or outlooks due to the tighter financial conditions," Standard & Poor's credit analyst Moritz Kraemer said in a statement.
"Over the past 24 months, however, we have lowered ratings or outlooks for a number of sovereigns in the sample with deteriorating credit fundamentals," he said.
As Kraemer explains, the point of the index is to identify which countries are likeliest to suffer as a result of creditors either reducing the risk in their portfolios or pulling money out of markets altogether.
"Placing a country in the vulnerable group is not a predictor of a negative rating action, just as being in the sheltered group is no predictor of a positive action," added Kraemer. "Everything depends on the policy reaction by the authorities."
Latvia was given a positive 1.3 index value, slightly above 1.2 for Iceland. Both countries have had their sovereign ratings downgraded in recent months by the agency.
The least vulnerable country is Russia, which has a large surplus in both its budget and current account.
Latvia's government, meanwhile, seems to have chosen not to heed the warnings by S&P and other agencies. On Sept. 3 the government agreed to strive for a budget surplus of 0.2 percent of GDP in 2008, which many economists feel is far too little for a country that is seeing double-digit GDP growth.
Parliament has yet to approve a number of amendments to the 2007 budget that aim to balance government spending. Previously the budget called for a 1.4 percent deficit.