It’s hard to believe how conditions have changed
CEE, you’re acting a little bit deranged.
Where once there were dreams of economic convergence
We now have nightmares, of defaults and divergence.
As growth turns to slowdown, and slowdown to recession
I hesitate to look forward, for the likely depression.

Ok, enough armchair poetry. Let’s get to the serious stuff. In yet another sign of the plethora of financial market, economic, and political challenges engulfing Ukraine, ratings agency Standard & Poor’s (S&P) downgraded the country’s short- and long-term foreign currency credit ratings two notches to ‘CCC+/C’ from ‘B/B’ on February 25. The situation emerging in the former Soviet republic is so severe, S&P decided to skip the ‘B-‘rating entirely. This latest development has left Ukraine scraping the bottom of the already dirty barrel of Emerging Europe sovereign credit worthiness, below the likes of Romania (Baa3) and Hungary (A3).

That said, Ukraine is by no means alone in this financial maelstrom. Indeed, on February 24, S&P cut Latvia’s sovereign credit rating to BB+/B from BBB-/A-3. Importantly, this decision downgraded the Baltic state’s credit rating into the ‘non-investment grade’ category.

This week’s decisions bring to seven the number of Emerging European countries that have so far faced the wrath of a ratings agency downgrade since the global financial crisis emerged in June 2008. That said, looking at some of the recent research put out by my colleagues at Business Monitor International (BMI), I’m willing to bet my next bowl of dog chow that more will follow. The countries that most stand out in my mind are Estonia, Kazakhstan, Lithuania and Montenegro, in particular. These four countries are like the kids in math class who, when the teacher would ask for someone to come to the board and solve the question, would shyly look away in the hopes they wouldn’t get picked. But let’s all get serious. We know these kids haven’t done their homework. We know they don’t have the capacity to answer the question. Some of them are even in the wrong class! It’s only a matter of time before the teacher says their name and the whole class finds out they don’t know a Pythagorean theorem from a linear polynomial.

So, the real question then becomes, how big will the ratings downgrades be going forward, and what impact will they have on economic and political stability? For Ukraine, I’ve made my case that the downgrade will have limited impact on financial markets in the short term. Indeed, I hold to my view that international investors have long priced in the ongoing disarray in the country (that said, I reiterate my long-held bearish outlook on all things Ukrainian).

What impact will the downgrades have on the other states throughout Emerging Europe? Well, certainly much will depend on how far the ratings agencies take their downgrades. Indeed, if we see Fitch and Moody’s try to one-up S&P by cutting a sovereign by three notches, I figure the end is nigh, and we should head for higher ground. To this end, it is important to note that BMI highlighted the deteriorating sovereign credit worthiness of several states in its latest Emerging Europe Sovereign Risk Ratings. Indeed, Estonia, Kazakhstan and Lithuania were rated ‘D’, ‘D’, and ‘D+’, respectively (Montenegro is not yet rated), signalling to me that they might want to start practicing running uphill.