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Latvian Rating Raised to BBB+ by S&P on Likely Euro Entry

Latvia’s credit rating was raised one level by Standard & Poor’s after the Baltic nation moved closer to adopting the euro following a positive convergence report from the European Commission last week.

S&P increased Latvia’s long-term government bond rating to BBB+, the third-lowest investment grade, on par with Ireland and Kazakhstan. The ratings company lowered the outlook to stable from positive.

The nation of 2.1 million won European Union endorsement on June 5 to switch to the euro in 2014, with a final decision by European finance ministers due on July 9. Latvia, the EU’s fastest-growing economy last year, would become the 18th member of the currency bloc and the second former Soviet republic to adopt the euro following Estonia’s entry in 2011.

“Euro-zone membership would have a positive impact on the government’s creditworthiness by mitigating foreign-exchange risks and providing the Latvian banking system with access to the European Central Bank as a lender of last resort and general provider of liquidity,” S&P said in an e-mailed statement from London. “Converting the lat to euro would eliminate the currency mismatch that exists in the Latvian banking system -- most lending is already in euros.”

Bonds, Swaps

The yield on Latvia’s dollar bond due 2020 rose 3 basis points to 3.451 percent today, data compiled by Bloomberg show. The cost to insure government debt for five years using credit-default swaps was unchanged at 127 points.

Other rating companies “are expected to” raise Latvia’s rating in the second half, Finance Minister Andris Vilks said in an e-mailed statement from the capital, Riga.

Moody’s Investors Service, which upgraded Latvia’s rating in March to Baa2, the second-lowest investment grade, said June 4 that euro adoption “would reduce Latvia’s susceptibility to event risks, particularly exchange-rate risk, and support the positive outlook on the rating.”

Fitch Ratings has the Baltic nation at BBB, also the second-lowest investment grade. It said May 31 that euro-region membership would be “likely” lead to an upgrade.

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