UPDATE 2-Latvia GDP slide deepens gloom over Baltic crisis

(Adds analysts' quotes, background, Swedish shares)

By Patrick Lannin

RIGA, Nov 7 (Reuters) - Latvia plunged further into crisis on Friday as figures showed its economy shrank a massive 4 percent in the third quarter, the worst performance for 13 years, and Moody's cut its ratings on the small country's debt.

Moody's, which also lowered its outlook on the rating of Lithuania and Estonia, said that in the worst case Latvia might need to follow Hungary in seeking help from the International Monetary Fund and the European Union.

The Latvian statistics office estimated third quarter gross domestic product (GDP) fell 4.2 percent, more than the 3.3 percent expected by analysts in a Reuters survey and down on the small 0.1 percent growth in the previous three months.

"The downturn of the economy has steepened, but even more negative figures are expected during the coming quarters, as the unemployment rate will turn upwards due to weakening output," said Nordea Baltic analyst Anssi Rantala.

The Latvian data added to gloom in the Baltic states, whose economies first overheated due to a huge influx of cheap credit by Nordic-owned banks, but which are now sliding as lending has been axed due to banks' fears they over-extended themselves.

Shares in Swedbank (SWEDa.ST) and SEB (SEBa.ST), the most active Swedish banks in the Baltic market, fell after the Latvian news. Swedbank fell to 75.50 crowns from 77.75 before the data, while SEB edged down to 86.25 from 88.

Domestic consumption in the region has slumped and worries have arisen over local banks. Latvia's government has already adopted a law to allow it to aid domestic banks if necessary.

Lithuania's incoming centre-right government has said it will draw up a plan to boost banks' liquidity and the central bank on Thursday cut bank reserve requirements to free up funds.

The slowdown has resulted in falling budget revenues and rising budget deficits in all three countries, with some fears they could breach the EU limit of 3 percent of GDP.

Parex Asset Management analyst Zigurds Vaikulis said in a note Latvian GDP would fall more in the fourth quarter and saw a 2008 GDP drop of 1.5 percent and 2.5 percent or more in 2009.

MOODY'S CUT

Moody's downgraded the foreign and local currency ratings of the government of Latvia to A3 from A2. The foreign currency deposit ceiling was also downgraded to A3 from A2. The outlook remained negative. Although the foreign currency bond ceiling remains at Aa1, its outlook was also moved to negative.

It did not expect a full blown crisis, but added: "If the situation were to worsen, Latvia could be forced to seek balance-of-payments support from the European Union and/or the International Monetary Fund."

"The global liquidity crisis will probably cause a shock to the Latvian banking system, which will reverberate throughout the rest of the economy," added Kenneth Orchard, Vice-President/Senior Analyst in Moody's Sovereign Risk Group.

Moody's said its cut of the outlooks on the ratings of Estonia and Lithuania to negative from stable was due a worsening economic slowdown.

"The reduction in external liquidity and export demand will probably lead to a deeper and longer recession than otherwise would have occurred," Orchard said of Estonia. (Reporting by Patrick Lannin, editing by Mike Peacock and Andy Bruce)