Nov. 3 (Bloomberg) -- Bulgaria and the Baltic states of Latvia and Lithuania will be the last European Union members to emerge from recession after a reversal of credit and investment flows devastated their economies, the European Commission said.

Bulgaria’s economy will keep contracting until the fourth quarter of next year, while Latvia and Lithuania will exit their recessions one quarter earlier, the Brussels-based commission, the EU’s executive arm, said today in its semi-annual economic forecasts.

Latvia and Lithuania have suffered the EU’s steepest decline in output after a credit shortage caused by the global financial meltdown halted a period of prosperity that followed EU accession. Bulgaria, the EU’s poorest nation, Latvia and Lithuania are also struggling to offset their currency pegs by slashing wages and cutting prices to bolster competitiveness, instead of resorting to a devaluation.

“The deterioration” in the Bulgarian economy “stemmed from the sharp contraction in both external demand and foreign investment inflows,” the commission said. In Latvia, “despite the massive correction already experienced in domestic demand, it is expected to contract still further due to the deleveraging process in the financial sector, the weakness of the labor market, the downscaling of industries” and “the fiscal consolidation process.” In Lithuania “the situation still looks fragile. The situation in the labor market is expected to worsen further.”

The EU’s eastern nations have been hurt by a sharp drop in exports, the main revenue earner of most of the region’s economies, while fiscal austerity measures have crippled domestic demand.

The Bulgarian economy will touch bottom at the end of this year or the first quarter of 2010, Bulgarian central bank Governor Ivan Iskrov said at a conference in Sofia today.

“We expect economic growth of 0.5 percent next year if the economy begins to recover in the second half of 2010, shadowing a recovery in our main export markets in the EU,” Iskrov said. “Should demand for Bulgarian exports be lower, it’s possible to have a contraction of 2 percent next year.”

The International Monetary Fund needed to step in and finance rescue programs in Hungary, Latvia and Romania as the countries faced defaults while struggling to refinance maturing debt and loans, many of them denominated in foreign currencies. The IMF has provided about $65 billion of loans to eastern Europe, which required more than $100 billion in bailout money.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: November 3, 2009 10:48 EST