Emerging Europe, the region hardest hit by the global economic crisis, will see its recession deepen before the outlook improves, which may lead to credit rating downgrades in about half the countries, Fitch Ratings said, Bloomberg reported.

“There’s further to go,” Edward Parker, head of emerging Europe ratings at Fitch in an interview in London yesterday. “Real economic activity is still falling quite rapidly. This year will be by far the deepest recession since the early years of transition” from Communism to market economy two decades ago.

The worldwide credit drought, which has left banks with more than $2 trillion in losses and writedowns, is taking its toll on emerging markets by cutting access to credit and investment. A reliance on exports and a consumption-fuelled credit boom have left eastern Europe among the most vulnerable to the worst global economic slump since World War II.

The region’s gross domestic product will shrink by 3.1 percent, the ratings company predicted last month. The contraction compares with GDP growth of 4 percent last year and an average pace of 6.8 percent in the five years through 2007.

Fitch is forecasting a return to growth next year, at a 1.4 percent rate, which will be “a very weak recovery,” Parker said.

“It’s not going to feel like much of a recovery,” he said. “We’re still going to see rising unemployment, pressure on bank balance sheets and public finances and some political pressures stemming from that.”

Rating Outlooks

Ten emerging European countries of the 21 Fitch rates risk being downgraded within about a year, Parker said. Russia, Hungary, Ukraine, Kazakhstan, Romania, Serbia and Georgia as well as the three Baltic nations of Latvia, Estonia, Lithuania, all have negative outlooks, which signals the company is more likely than not to cut their grade.

“We have 10 countries, half the countries in the region, on negative outlooks or rating watch negative and none on positive outlook,” said Parker. “That is a clear signal how we see the direction of creditworthiness in the region.”

The likelihood that an outlook is followed by a rating change in the same direction has historically been about 60 percent at Fitch, typically within a year, Parker said. The global economic crisis may raise those odds, he added.

“In the current environment where things are changing quite rapidly and there’s quite a bit of momentum in rating changes if anything the follow through may be higher than the historical average,” he said.

Weakest, Strongest

Fitch is assessing balance of payment trends, the ability of countries to refinance external debt, economic policy responses to the hardships and success in attracting international aid when deciding on rating cuts, Parker said.

The ability of countries that have received bailouts from the International Monetary Fund to stick with the conditions, such as spending cuts, will also determine the credit grades.

The “weakest credits” in the region are Moldova, at B-, the sixth lowest junk rating, Ukraine, one step higher at B, and Georgia, one further at B+, said Parker. The assessment reflects that they are among the poorest countries in the region with weaker governmental institutions and more vulnerable to sharp declines in capital inflows, he said.

The “strongest credits” are the Czech Republic and Slovakia, at A+, the fifth-highest investment grade, and Poland, two steps lower at A-, Parker said.

Slovakia’s euro-region membership makes it a “safe harbor,” while the Czech Republic and Poland are better placed than other east European countries to withstand “global shocks” because of their lower deficits, credible exchange rates and a lack of previous fast credit expansion, he said.

Most recently, Fitch cut the credit ratings for Estonia, Latvia and Lithuania on April 8, citing deteriorating economic prospects. Latvia’s economy will contract 12 percent this year, while the Estonian and Lithuanian economies will shrink 10 percent, Fitch estimates.

“It is very rare for countries to go through that kind of savage economic adjustment,” said Parker. “That will place strains on the macroeconomic policy framework and budgets and increase political pressures that governments face.”