On March 22, 2007 we published ???New Europe: Mind the Ratings???, concerning the prospects for sovereign debt credit rating in EU8+2 (Estonia, Latvia, Lithuania, Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Romania and Bulgaria) as well as examining the probability for rating changes conducted by one of the three big rating agencies Moody??™s, Standard & Poor??™s (S&P) and Fitch. Our analysis indicated that Bulgaria, Estonia, Latvia, Lithuania and Romania were in the danger zone of negative rating action by one of the three big rating agencies within the next year. By contrast, the Czech Republic is likely to face positive rating actions during the next year. Since our report was published in late March, Fitch altered its outlook for Lat-via to negative from stable (???Latvia: Yet another warning - Fitch changes outlook to negative???, published on April 4, 2007) and S&P changed its outlook on Romania to stable from positive on the same day.

Our presented results, now confirmed by S&P, have sent out warning signals regarding the continuing overheating in European emerging economies, with emphasis on Bulgaria, Estonia, Latvia, Lithuania and Romania as the ???five overheaters???.

On April 18, 2007, S&P published a report entitled ???Emerging Europe Economies Still Growing, But Some May Like It Not So Hot??? which is S&P??™s first piece of research to focus exclusively on Europe??™s emerging market economies. Certain European Emerging Market sovereigns need to be aware of overheating risk, S&P said in its report. The overheating stems, according to the rating agency, from increased investment flows and buoyant domestic demand. Between October 1, 2006 and April 18, 2007, 22% of European emerging market economies were upgraded and none were downgraded. However, this pattern looks set to be broken, according to S&P, and in line with our abovementioned report. The warning by S&P about coming negative rating actions is for some countries very severe and it further argues that not even large fiscal surpluses, such as those in Bulgaria and Estonia, will be sufficient to decrease demand and thereby avoid a hard landing in the face of continued strong domestic credit growth. Moreover, it is worth noting that the situation is worsening as time goes by, and thus the probability for a soft landing is decreasing. Besides that, countries with large external imbalances relative to export-generating capacity, such as Latvia and Romania, experience a substantial risk of downgrading activity in the near future. The more positive statements from S&P rest on the Czech Republic, where the rating is supported by good prospects for economic growth, a well-diversified economy, an above-par external position and a sustainable domestic credit level. Poland is also experiencing positive outlooks, but it is likely that further positive rating actions will not be made until issues such as political instability, which is obstructing progress in structural reforms, a high general government debt burden, and high, albeit rapidly falling unemployment, have undergone certain improvements.