* Romania initiates talks on possible aid
* Fitch sees Czech economy shrinking by 1.5 pct in 2009
* Hungary launches budget reshuffle, eyes tax cuts
(Adds Romania passes austere budget and does not rule out
IMF help)
By Justyna Pawlak
BUCHAREST, Jan 29 (Reuters) - Romania has started talks with
the European Commission on a potential rescue loan to shore up
its strained finances, an EU official said on Thursday,
underlining a deepening of financial woes in eastern Europe.
Hungary also launched a $4.5 billion budget reshuffle to
combat the economic crisis and data showed Polish growth slowed
at the end of 2008, with several analysts saying it could now
slip into recession in the first half of 2009.
Ratings agency Fitch predicted the export-dependent Czech
economy would shrink by 1.5 percent in 2009 due to vanishing
demand for its products in western Europe, but it said its
sovereign debt rating was safe due to low debt levels.
Once seen by most analysts as insulated from the global
turmoil, central and eastern Europe is now facing a downturn
that has prompted economists to slash growth forecasts and sent
policymakers scrambling for measures to stave off the crisis.
Latvia and Hungary have secured rescue packages from the EU
and IMF as states sought outside support to plug gaping holes in
their finances or to calm spooked markets.
Many economists predict Romania and southern neighbour
Bulgaria may be next as the global crisis cuts off sources of
cash to fund their vast current account deficits.
An EU delegation arrived in Bucharest this week, parallel to
a regular mission from the International Monetary Fund, and
talks on aid were likely after Romanian President Traian Basescu
said this week an EU loan may be needed.
"They will discuss macroeconomic stability and probably they
will talk about the possibility of giving Romania financial
support," Nicolae Idu, head of the EU delegation in Bucharest
told Reuters. "President Basescu ... has discussed (with the EU
Commission) the possibility of getting European financial aid
worth 6-7 billion euros. This discussion is now initiated."
The IMF has said a rescue package is not on the agenda of
its mission this week.
RESCUE WHO?
Also on Thursday, Prime Minister Emil Boc's centre-left
government approved a budget that plans to cut the government
deficit to 2 percent of gross domestic product (GDP) this year,
from 5 percent in 2008, although some analysts said its
forecasts were too optimistic.
Boc also listed options for potential rescue if necessary.
"We have a problem with financing the deficit, we have many
solutions, including the EU and the IMF. We don't rule out any
of them and we will take a decision at some point," Boc said.
Diplomats warn that Bucharest's 5-week-old government risks
facing social discontent likely to be triggered by budget
cutbacks as unemployment is on the rise.
There have been no mass protests in Romania so far, in
contrast to its southern neighbour Bulgaria where riots rattled
the governing coalition earlier this month as fears of economic
pain and anger over poor policy-making reached boiling point.
Violent protests also broke out this month in Lithuania and
Latvia, both seen mired in recession this year.
DWINDLING OUTPUT
Reacting to drying up demand from the West, local companies
have slashed production, cutting thousands of jobs across the
region. Some major producers have halted factories temporarily
or cut back to four-day working weeks.
Preliminary data from the EU's biggest ex-communist state,
Poland, showed growth slowed to 4.8 percent in 2008 -- a touch
below forecasts and down from 6.7 percent a year earlier.
Piotr Kalisz, chief economist at Citi's Bank Handlowy, said
the numbers indicated fourth-quarter GDP fell compared with the
previous three months, largely due to declining investments and
because a paucity of credit was starting to affect firms.
Polish central banker Miroslaw Pietrewicz said on Thursday
he was in favour of further "decisive and significant rate cuts"
following Tuesday's larger-than-expected 75 basis point cut.
Central banks across the region have slashed rates as
concern over sliding growth replaced last year's worries that
inflation could spiral out of control.
Poland has cut by 1.75 percentage points to 4.25 percent
since November and the Czechs by 1.25 points to 2.25 since
August, and Hungary has taken back two-thirds of a 300 basis
point hike in October.
In Hungary, Prime Minister Ferenc Gyurcsany said his
government would reshuffle around 1 trillion forints ($4.57
billion) worth of budget items by slashing personal income tax
and employers' social contributions to boost the economy.
He said a 4 percent "solidarity" tax on corporations and the
wealthy introduced in 2006 should be eliminated. But he proposed
offsetting the revenue loss with a modest rise in the value
added tax (VAT), the elimination of some tax allowances, a
wealth tax on the richest and the reduction of social spending.
"A joint and comprehensive reform of the tax, social and
employment systems is needed," Gyurcsany said. He did not
specify the exact size of tax cuts and rises planned.
(Reporting by Radu Marinas in Bucharest, Balasz Koranyi in
Budapest, Adrian Krajewski in Warsaw, and Jason Hovet in Prague;
Writing by Michael Winfrey and Justyna Pawlak; editing by
Stephen Nisbet)
