Bulgaria, Czech Republic, Latvia, Lithuania Debt Outlooks Are Cut by Fitch

Fitch Ratings revised down its credit outlooks for Bulgaria, Latvia, Lithuania and the Czech Republic to stable from positive as Europe’s economic-growth prospects deteriorate amid a sovereign debt crisis.

“Strong economic and financial linkages mean that countries in central and eastern Europe are being adversely affected by downward revisions to economic-growth prospects and heightened financial stress in the eurozone,” Ed Parker, Managing Director in the EMEA Sovereign group at Fitch in London, said today in a statement.

Eastern Europe’s export-led recovery from its worst slump since the end of communism is in jeopardy from the threat of a new recession in the U.S. and Europe’s sovereign debt crisis. The region depends on export demand from euro-area nations to drive its growth and about three-quarters of its banks are owned by foreign, mainly west European lenders.

Economic growth in the 12 former communist countries that are now part of the 27-member European Union will reach 3 percent this year, according to a World Bank report published Nov. 16.

“Weaker GDP growth will make it more challenging for CEE countries to reduce budget deficits, while heightened risk aversion may make it more expensive to issue debt in external markets,” Fitch said in its statement today. “Bond yields and credit-default swaps in CEE markets have risen significantly in the second half. This re-pricing of risk highlights how CEE countries are exposed to the deepening of the eurozone sovereign-debt crisis, in light of the strong economic and financial links with the region.”

Regional Assessments

Fitch affirmed Bulgaria’s and Latvia’s BBB- rating, the lowest investment grade, Lithuania’s BBB score, which is one notch above Bulgaria and Latvia, and the Czech Republic’s A+ assessment, the fifth-highest investment grade.

Standard & Poor’s said on Dec. 5 that the worsening asset quality at the eastern European units of Austrian banks may force the Alpine republic to inject aid into the lenders.

Austrian banks, including Erste Group Bank AG (EBS) and Raiffeisen Bank International AG (RBI), have lent $266 billion to borrowers in the formerly communist parts of Europe, the most of all countries reporting to the Bank for International Settlements and equivalent to about 70 percent of Austria’s gross domestic product. Those numbers don’t include the investments of Vienna-based UniCredit Bank Austria, which are attributed to Italy.

‘Positive Rating Actions’

“An improvement in the European macroeconomic and financial environment could allow underlying country-specific factors to come back to the fore and lead to a resumption of positive rating actions,” Fitch said today. “However, a material intensification of financial stress and a severe recession in the eurozone could lead to negative rating actions. Ratings will also be driven by country-specific factors.”

Standard & Poor’s earlier today affirmed its long-term rating for the Adriatic sea nation of Montenegro at ‘BB’ and said the outlook remains negative to reflect the likelihood of a downgrade “if Montenegro has difficulty in meeting its 2012 external financing requirement.”

To contact the reporter on this story: Alan Crosby in Prague at Acrosby1@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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