RTTNews - Fitch Ratings in a report on Thursday said an agreement between the Latvian authorities and the IMF mission in Riga over a new budget deficit target, which would lead to the next round of the disbursement from the IMF and EU, would be critical for maintaining the Lats exchange rate peg to the euro. This comes in the back of mounting speculation by public and market participants about a possible devaluation of the currency.

The IMF has agreed to a revision of the budget deficit to 7% from the original 5% target, and is in discussion with the Latvian authorities regarding the latest proposals. This is necessary, to secure the next round of the disbursement amounts from the IMF and EU fund totaling EUR 1.4 billion, which is part of the EUR 5.7 billion bail out scheme agreed to in December last year.

A breakdown in the relationship with the IMF and EU would leave Latvia facing a substantial budget and external financing gap, and this scenario would cause a swift devaluation of the Lats, the Fitch noted. Moreover, the agreement would be necessary to maintain its current rating level. The firm also noted a devaluation of the currency would lead to a severe negative credit rating for Latvia, given its high external debt (128% of GDP at end-2008) and foreign currency loans in the banking system (90% of the total).

Fitch downgraded Latvia's Long-term foreign currency Issuer Default Rating by a total of four notches to 'BB+', starting in August 2007, with latest downgrade on April 8. The outlook on the ratings remains negative.

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