Moody's Investors Service Thursday lowered the Latvian government's foreign and local currency ratings to Baa3 from Baa1, giving a negative outlook.

The rating agency said that with the depth and the pace of economic adjustment in Latvia being more severe than anticipated, the government's revenues and budget deficits were being negatively affected, causing budget-related conditions in the IMF stand-by arrangement to be missed.

Moody's noted that the Latvian government's liquidity was under undue stress owing to reduced revenues, problems in the locally owned portion of the banking sector, and limited financing options in the domestic and international markets. Moody's therefore said that the government should identify sufficient budget adjustments to maintain access to the IMF/EU funding.

The firm forecasts the debt/GDP ratio to double to more than 50% of GDP by the end of 2010. Moody's noted that delaying expenditure cuts could damage investor confidence and risk the goal of euro adoption in 2012.

Meanwhile, the firm forecast the Latvian economy to shrink 12-13% in 2009, which is likely to have a negative effect on incomes, profits and consumption that are unlikely to recover in the near term.

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