Moody's: Downgrade risk for emerging Europe

The agency said 11 countries -- ranging from Iceland to the much lower rated Baltic states -- were currently in a "danger zone" with high current-account deficits and domestic credit to gross domestic product ratios causing serious macroeconomic imbalances.

"Macroeconomic stress has been gradually building across Emerging Europe and is starting to reach critical levels," said Moody's vice president Kenneth Orchard, author of a report on the countries and their credit ratings.

"The probability of these imbalances ending in hard landings has increased with the recent turmoil in global capital markets."

Moody's said its ratings have so far assumed a relatively orderly reduction in growth and imbalances, rather than any "hard landing," which would encompass problems in the financial sector as well as a decline in the currency.

Moody's said its ratings for these countries were generally more positive compared to the credit default swaps (CDS) markets, which are factoring in a material risk of debt default in some countries.

Moody's said Iceland, Estonia, Bulgaria, Kazakhstan and the Czech Republic had demonstrated "excellent financial strength" and were likely to remain resilient even faced with a higher level of financial stress.

Romania, Poland and Croatia were also in a relatively strong position, Moody's said, although could face medium to large increases in public debt, potentially imposing slight downward ratings pressure.

But it warned of hard landing risks in Hungary, Latvia and Lithuania, where a significant increase in public debt would sap governments' financial strength and risk ratings downgrades.

Moody's said government finances remained generally strong across the countries surveyed, with public debt levels healthy.

But debt ratios were on the rise due to a decline in physical revenues and this was leading to budget deficits.

Moody's said some countries, in particular Romania and Hungary, might have trouble refinancing their debt due to their shallow local investor bases.

However, outright default by these creditors was unlikely as governments could seek temporary finance from the International Monetary Fund, World Bank, the European Commission or neighboring central banks.