Baltics: Fitch downgrade and more downgrades to come
The first time I wrote about the Baltics was back in August in a post entitled, “Are the Baltics the new Argentina?.” Since then, things have gotten progressively worse and the Baltics are clearly in Depression with Latvia leading the way to the downside. The credit ratings agencies have caught on to this and Fitch is marking the countries down near and into junk territory with negative outlooks. Win Thin of Brown Brothers Harriman has a good read on what to make of this:
Fitch downgraded the Baltics and kept the outlooks at negative. Estonia was cut to BBB+ from A- Latvia was cut to BB+ from BBB-, and Lithuania was cut to BBB from BBB+. The only surprise to us was that the downgrades weren’t deeper, as we see eventual junk status (below BBB-) for all three. As we noted in our most recent FX quarterly, the ratings agencies have been overly generous with Eastern Europe, particularly the Baltics. Our sovereign rating model puts Estonia at a BB/Ba2/BB rating, way below actual ratings of A/A1/BBB+. For Lithuania, we rate it BB+ vs. actual BBB/A2/BBB. For Latvia, we rate it B+ vs. actual BB+/Baa1/BB+. Others that are overrated in the region include Bulgaria (we rate it BB- vs. actual BBB/Baa3/BBB-), Hungary (we rate it BB vs. actual BBB-/Baa1/BBB, and Romania (we rate it BB vs. actual BB+/Baa3/BB+).
By the way, we still expect Bulgaria, Estonia, and Lithuania to join the others in IMF programs this year. EMEA remains the weak link in emerging markets, as a glance at our vulnerability table will verify, and we continue to question the viability of the pegs in the Baltics and Bulgaria. Investors have turned more positive on EM in recent weeks, but are surely differentiating between the good (Brazil, China, etc.), the bad (South Africa, Turkey, etc.), and the ugly (Baltics, Bulgaria, Hungary, etc.). We cannot see investors piling back into the EM countries with the worst fundamentals even if the global crisis continues to abate.
Much worse is coming to Eastern Europe and the Baltics are the worst of the lot. You should note that Sweden has significant exposure in the Baltics and downgrades there will weigh heavily on that country. Marc Chandler of BBH also picks up this theme:
Austria and Belgium have a higher percentage of their GDP in Eastern European exposure than Sweden, but are protected to some extent by being in the eurozone. Sweden’s exposure is concentrated in the Baltics. It’s currency floats freely. The Fitch downgrade and negative outlook for the Baltics has seen the krona hit. The euro hit a high on of SEK10.9840 in response and this represents a new high on the month. The SEK11.00 is a important barrier, around where stops are thought to lie. The euro is moving above the 20 day moving average for the first time since March 11th. A break of SEK11.00 could see a quick move toward SEK11.10-SEK11.20.