Fitch included the Baltic duo in a sweeping downgrade thatalso included Bulgaria and Romania. Lithuania had already been given a thumbsdown back in December 2007 when it too was downgraded to negative from stable.
"Current account deficits in the Baltic States, Bulgaria and Romaniahave risen to levels that look disconcertingly stretched by current global orhistorical standards," said Edward Parker, Fitch's Head of Emerging Europesovereigns.
"External deficits that were easy to fund in times of abundantliquidity and risk appetite may be harder to finance following the globalcredit shock. The Negative outlooks reflect the heightened downside risk of anabrupt slowdown in capital inflows and a costly macroeconomic adjustment."
Fitch estimates 2007 current account deficits (CADs) at 25% of GDP inLatvia, 19.5% in Bulgaria, 16% in Estonia, 14% in Romania and 13.7% Lithuania.Along with Georgia (rated 'BB-' (BB minus)/Stable), Fitch estimates these to bethe highest CADs out of all of the 105 Fitch-rated sovereigns.
Concerns over substantial CADs, external financing requirements and rapidcredit growth have heightened over the past twelve months as macroeconomicimbalances have widened.
The recent global 'credit crunch' has exacerbated matters further, leadingFitch to conclude that the economic prospect for the Baltic region is weakening.
Inflation remains high, weakening euro area GDP growth will adversely affectexports and delays to euro adoption timetables are further factors identifiedby Fitch as worries.
The latest move continues a steady decline in Fitch's ratings for theregion. It downgraded Latvia's long-term foreign currency to 'BBB+' from 'A-'in August, and revised the outlook on Lithuania's long-term foreign currency toNegative from Stable in December.