Analytics, EU – Baltic States, Financial Services, Investments, Latvia, Lithuania

Latvian CDS costs were 265 basis points higher than Lithuania's in October 2009. Latvia's decision to sell bonds "could see the CDS market once again differentiate between Latvia and Lithuania," said Gillian Edgeworth and Dmitry Veselov, London-based analysts for UniCredit, in a report published on Monday.

Lithuania returned to international markets in June 2009, when it sold 500 million euros of bonds. Latvia, which turned to a group led by the European Commission and the International Monetary Fund for a 7.5 billion-euro bailout in 2008, may sell as much as 1.5 billion euros of bonds this year, Finance Minister Andris Vilks has said.

The final review of Latvia's current stand-by agreement is scheduled for November. The government may at that time seek a new precautionary agreement to provide a safety net for public finances, Edgeworth and Veselov said in the note. "In the base case, this will not involve disbursement of additional financing but instead an increased reliance on market financing," they said.

Plans by Latvia and Lithuania to follow Estonia into the euro zone in 2014 may face opposition from some members of the currency union because of the sovereign debt crisis in the region, the analysts said. "There is little doubt but the current EMU crisis has increased opposition among EMU members to enlargement," Edgeworth and Veselov said. "Indeed it is not clear that Estonia would have gained entry if it had pushed for assessment this May rather than last," they said. "Should Latvia and Lithuania hope to achieve this at any point in the next 3-4 years, continued fiscal consolidation and maintenance of a manageable current-account deficit is essential," according to UniCredit.

CDS prices typically fall as investor confidence improves and rise as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals 1,000 dollars annually on a contract protecting 10 million dollars of debt, reports LETA/ELTA, referring to Bloomberg.