EastEurope's markets recover but crisis may delay euro

Eastern Europe`s battered markets rebounded in a relief rally on Monday but financial woes prompted the IMF to offer financial help to Hungary and may undermine the Polish government`s 2012 euro adoption plans, Reuters reported.

The crisis has highlighted the vulnerability of the region`s developing economies to market shocks, and has forced politicians to run a reality check, with Hungary reducing its deficit targets and cutting its economic growth forecast.

Hungary, one of Europe`s most vulnerable economies due to its high deficits and heavy reliance on external financing, was hit the hardest in falls on Friday, with the forint plunging to two-year lows versus the euro before recovering on Monday.

Poland`s central bank governor said the global situation should force a rethink of government plans to join the euro zone in 2012, which many economists have already said is unrealistic in the face of domestic political obstacles.

A weekend agreement by euro zone countries to shore up the European banking sector drove stock and currency markets higher across the region on Monday [nLD300907], but ripples of the global financial crisis continued to reverberate.

The International Monetary Fund said it was ready to offer financial and technical help to Budapest if needed, though Budapest underlined that would be a last resort.

"We needed this offer so those who attack us see that we have strong allies and that Hungary is not alone," Prime Minister Ferenc Gyurcsany told a news conference. "We needed this offer so we`d never have to resort to using it."

IMF chief Dominique Strauss-Kahn said Hungary had seen market stress despite improved macroeconomic and financial policies in recent years.

"We will provide technical assistance as needed and, in the context of a supportive policy setting, are ready to undertake discussions on possible financial assistance, responding rapidly," he said in a statement.

EURO TARGETS

Hungary has no euro target date at the moment, but on Sunday Gyurcsany proposed that Hungarian political and economic leaders should hold a "national summit" to adopt a plan to enter the euro zone and work out a long-term economic programme.

Meanwhile, some Polish and Czech officials sent more cautious signals on joining the euro zone -- a move that could require policy to restrain inflation and government spending and other economic reforms.

"The current situation prompts a rethink of the euro entry date," Polish central bank chief Slawomir Skrzypek told daily Rzeczpospolita in an interview.

"Before we enter the ERM-2 rate exchange mechanism, the global financial turmoil should be finished."

Czech Finance Minister Miroslav Kalousek told a newspaper he was now cautious about a euro entry date, suggesting he no longer favours fast adoption of the single currency. The Czechs have not yet set a target for swapping their crown for the euro.

"At a moment when a number of significant countries of the euro zone say that the Growth and Stability Pact does not have to be essential and important for them, then I am (cautiously) considering our entry date to the euro zone," Kalousek said.

RISKS REMAIN

The region`s central bankers also moved to reassure markets and depositors that their countries` banking sectors were stable and had sufficient liquidity to weather the crisis. Hungary`s OTP , the region`s largest independent bank, rallied after its stock plunged on Friday.

The Polish central bank said it would discuss measures to aid the banking system at an unscheduled meeting of its Monetary Policy Council (MPC) on Monday while the Czech Finance Ministry said it was not planning any rescue package for the banking sector because the country`s banks were healthy.

Some analysts said however that the high level of foreign bank ownership in the region carried some risks.

"The first risk is that Western European banks, faced with capital constraints, change their strategy towards Eastern Europe: instead of growing their subsidiaries` balance sheets, they decide to shrink them," Citigroup said.

"If credit growth in Eastern Europe slows then that will be associated not only with a slowdown in domestic spending growth, but also a contraction in Eastern European countries` current account deficits," it added.

While a fall in the current account gap is a good thing, the risk is that western European banks may repatriate funding which could pose a threat to financial stability, it said.

Citigroup said the countries at greatest risk were Ukraine, the Baltics, Turkey, Romania and Bulgaria.

Reuters