Standard and Poor's raised Latvia's sovereign rating by a notch on June 10 citing the country's likely entry to the Eurozone. The move comes less than a week after the Baltic state got the nod to join the single currency, and increases the likelihood that Riga will soon look to reap the benefits with a bond issue.
S&P increased Latvia's long-term government bond rating to 'BBB+', the third-lowest investment grade, but lowered its outlook to stable from positive. On June 5, the Baltic state got the green light from the European Commission and European Central Bank to its application to join the Eurozone, with a final decision from the Council of Europe due on July 9.
"Eurozone 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 it a statement. "Converting the lat to euro would eliminate the currency mismatch that exists in the Latvian banking system -- most lending is already in euros."
With the anticipation of an end to the US Federal Reserve's bond buying programme quashing appetite for high-yielding emerging market debt, Riga will likely be hoping to see Moody's or Fitch join S&P in offering an upgrade soon. That would help Latvia get an issue away at the lower pricing it hopes to achieve, one of the major benefits of joining the currency bloc.
Latvia has said that it hopes to see borrowing costs sink and investment rise thanks to euro membership, and both Moody's and Fitch said ahead of the June 5 announcement that they would review their ratings should the country get the green light. June 10 saw Riga launch its "non-deal" roadshow to discuss capital markets funding opportunities for the year ahead with investors around Europe.
Moody's said on June 4 that, assuming Latvia got the nod, it would likely offer an upgrade based on the country's strong GDP growth - the highest in the EU in 2012 - and the strict fiscal discipline that has reigned over the budget since the economy fell off a cliff in 2008. The ratings agency said approval would reduce susceptibility to event risks and support the agency's positive outlook on its rating, which currently sits at the second lowest investment grade of 'Baa2'.
A full set of upgrades, and consequent strong debt sale, would also offer a response to those suggesting the country is mad to be joining the problem-riddled European currency. Analysts at RBS wrote recently that they fully expect Latvia to get the final go ahead to join in the summer, and for Riga to move swiftly to take advantage.
"The final decision on July 9th for Latvia to adopt the euro from January 2014 is nothing but a formality in our opinion," they noted on June 5, "and should be a trigger for rating upgrades. We expect the Treasury to take advantage of these positive developments and tap international markets with a EUR1bn external placement in the coming few weeks."
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