March 3 (Bloomberg) -- The cost to protect against a default by Latvia, the first European Union member priced at so- called distressed levels, rose to a record after the country’s unemployment climbed to the highest in almost nine years.

Credit-default swaps linked to Latvia increased nine basis points to an all-time high of 1,109 basis points, according to CMA Datavision in London. The cost is above the 1,000 level, breached last week, that investors consider distressed, and is about 270 basis points above contracts linked to Lithuania, the next-highest EU member.

Latvia’s registered unemployed increased to 9.5 percent of the 2.3 million population by the end of February, from 8.3 percent in January, Baiba Pasevica, the director of the National Employment Office, said today. The country was forced to seek a 7.5 billion-euro ($9.5 billion) International Monetary Fund bailout last year and last week had its credit rating lowered to non-investment grade by Standard & Poor’s. The rating is on negative outlook, indicating a possible further cut.

Latvia’s economic boom, sparked by entry into the EU in 2004 and fueled by soaring wages and cheap credit, has turned to bust as the economy contracted 10.5 percent in the fourth quarter and the government collapsed last month.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deteriorating perceptions of credit quality.

A basis point equals $1,000 on a swap protecting $10 million of debt from default.

To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.net

Last Updated: March 3, 2009 06:09 EST