Lithuania's economy will face more challenges ahead, but has little risk of "a major crisis," credit rating agency Moody's said on Tuesday.

Economists have warned that the fast-growing Baltic states, including Lithuania, were overheating and could face a hard landing.

Lithuania's A2 rating with stable outlook reflected the possibility that imbalances could lead to some "dislocations" along the way to convergence with the rest of the European Union, the agency said in its annual country report.

"The remarkable widening of the (current account) deficit over the past two years is a serious economic imbalance and is clearly unsustainable," the report said.

The deficit was expected to reach over 14 percent of gross domestic product this year from 7.1 percent of GDP in 2005.

However, the agency said that "the risk of a major crisis appeared to be minimal," as foreign banks were expected to reduce the growth of credit, which has poured into Lithuania.

The arrival of Scandinavian banks Swedbank, Nordea and DnB NORD has driven a rise in credit in the Baltic countries, helping fuel a property boom and consumption.

"The wider current account deficit has been largely financed by external borrowing from foreign banks," Moody's Senior Vice President Kenneth Orchard said in a statement with the report.

"However, the fact that local banks are now almost entirely foreign-owned, and that the bulk of the borrowing is from parent institutions, lessens concerns about refinancing risks," he added.

Inflation, which prevented Lithuania from joining the euro zone in 2007, would not slow down in the medium-term, casting a shadow on euro zone perspectives, the agency said.

Lithuania's inflation accelerated to 7.1 percent in September from a year earlier, a 10-year high, and was up 1.4 percent from August, the statistics office said on Monday.

The central bank has said the rate of rising prices is part of a normal convergence process to Western European levels after Lithuania's entry into the European Union in 2004.

But Moody's said it believed that "the easy period of convergence is now past and that Lithuania faced more challenging times ahead."

Lithuania said it would attempt to adopt the euro in 2010 or later, depending on its inflation level.

The agency said it was still possible for Lithuania to meet the Maastricht criterion on inflation in 2010-2011, but inflation could remain above the reference for many years to come.

However, a long delay in euro zone membership would pose no serious problems or threaten the Lithuanian government's credit-worthiness, it added.

Source: Reuters