London, 23 November 2009 -- Lithuania's Baa1 government bond ratings reflect its medium economic and high institutional strength, as well as its poor fiscal outlook and rising government debt, says Moody's Investors Service in its new sovereign credit report on Lithuania.


"Moody's believes that Lithuania's economic strength has been damaged by the economic crisis, and growth is unlikely to return to its previous pace in the foreseeable future," says Kenneth Orchard, Vice President-Senior Credit Officer in Moody's Sovereign Risk Group and author of the report. "Although the Lithuanian economy is beginning to stabilise, Moody's expects it will be sluggish for at least 2-3 years after the large contraction in 2009. De-leveraging, slower growth in the major EU countries and diminished capital inflows are likely to reduce the country's long-term potential GDP growth to 3%-4% from 5%-6% per annum previously, with convergence with the Eurozone average likely to take many decades."


Moody's notes that Lithuania's institutional strength is high, reflecting the progress made in strengthening the country's public administration and policymaking prior to EU accession. "However, Lithuania's institutional framework is being tested by the economic crisis," says Mr. Orchard.


The economic downturn has resulted in large budget deficits and rapidly rising level of government debt. "Government revenues are highly geared to domestic demand growth and therefore will probably be weak until private investment returns," explains the analyst.


Moody's notes that access to deficit financing has improved since last winter, but the government is heavily reliant on the international capital markets. "The market for local currency-denominated debt is limited by the structure of the banking system and the small size of domestic pension funds," says Mr. Orchard.


The Baa1 rating also recognises that Lithuania is moderately susceptible to event risk, due to external and financial vulnerabilities. The structure of economic growth during the past few years was very unbalanced, with credit-fuelled domestic demand significantly outpacing the export sector, leaving a legacy of high debt and inflated asset prices. However, Moody's concerns are somewhat mitigated by the belief that the Nordic banks that own the major Lithuanian banks will provide liquidity and capital support to their subsidiaries as necessary. EU membership should also ensure access to extraordinary financing to support the currency in a stress scenario.


The issuance of this credit report by Moody's Investors Service is an annual update to the markets and is not a formal action to alter the credit rating of the issuer.