Fitch Ratings said on January 31 it revised the outlooks of the credit ratings for four eastern European countries, including Bulgaria, to "negative" from "stable" over growing concerns that the macroeconomic imbalances in those countries worsened over the past 12 months.

"Current account deficits in the Baltic States, Bulgaria and Romania have risen to levels that look disconcertingly stretched by current global or historical standards," Fitch analyst Edward Parker said in a statement.

The global credit crunch triggered by the subprime crisis in the US is a significant shock for these economies, while weaker gross domestic product (GDP) growth in the euro-zone will have a further negative impact on exports from the four countries affected by the agency's decision.

Foreign investment flows have been instrumental in keeping current account deficits (CAD) financed, but should the capital flows dry up, the four countries - Bulgaria, Estonia, Latvia and Romania - would be the ones that would be hurt the worst, Fitch warned.

"External deficits that were easy to fund in times of abundant liquidity and risk appetite may be harder to finance following the global credit shock. The negative outlooks reflect the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment," Parker said.

The credit rating agency estimated Bulgaria's current account gap at 19.5% of GDP for 2007, making it one of the countries with the highest current account deficits among the 105 nations rated by Fitch.

"There are valid grounds for believing that fast-growing transition countries can sustain high CADs, but history suggests it can be dangerous to think "it's different this time", the agency said.

Rapid bank credit growth and external borrowing, often from foreign parent banks, has played a key role in both fuelling and financing current account deficits, Fitch noted. However, high rates of foreign bank ownership have been a net positive for the region, but could open a channel of contagion, should the global credit squeeze persist, it added.

Although the global credit shock could help to engineer a welcome moderation in credit growth and a gradual unwinding of external imbalances, it would most likely come at a price, since economic adjustment is unlikely to be smooth after such a strong financial boom.

Fitch believes that a broadly soft landing remains the most likely scenario in each of the four countries, but the downside risk of a hard landing has increased. A hard landing, particularly if it involved the abandonment of a currency peg, like in Bulgaria's case, would entail significant economic costs and likely lead to rating downgrades.

The agency currently rates Bulgaria at 'BBB' for long-term debt instruments in foreign currency and 'BBB+" for long-term debt instruments in local currency. Both ratings had their outlook changed to "negative" from "stable."