* Politics, planned tax changes push yields higher
* Funding not critical thanks to aid, spending cuts
* Low interest rates make short term CEE debt attractive
By Marius Zaharia and Jason Hovet
BUCHAREST/PRAGUE, June 18 (Reuters) - International aid and
increasingly tough austerity measures will help emerging Europe
avoid a financing crisis, despite demands from investors for
ever-higher yield premiums at debt auctions this spring.
Tension over Romania's ability to enforce painful pay cuts,
uncertainty over tax changes in Hungary and record borrowing in
the Czech Republic have caused some debt tenders to fail or fall
short and will keep upward pressure on yields.
But IMF/EU aid flows and a lower debt level than developed
Europe have allowed debt agencies to be picky about what yields
they concede, while a lot of work to bring budget deficits below
3 percent of GDP (gross domestic product) in two to three years
is already happening.
"I don't see any reason to be absurdly scared about the
ability to refinance in the region," said Luis Costa, director
of CEEMEA strategy at Citigroup.
"Even for the extreme case, which is Hungary ... if markets
offer much higher yields and (bonds offered at) auctions cannot
be sold entirely, Hungary can still manage because of
multilateral (IMF/EU) flows."
Usual suspects Romania and Hungary were hardest hit by
fiscal doubts and weak global risk appetite in recent weeks.
They enjoy similar-sized aid packages from the International
Monetary Fund and European Union.
A funding crisis could hit Romania only if its 20 billion
euro ($25 billion) aid deal is scrapped, but economists say the
worst-case scenario is a temporary halt. The government will
probably hike taxes if its planned pay cuts are turned back in
court.
Hungary's immediate financing is not seen under threat even
if it is unable to sell bonds during the rest of the year. It
survived a six-month period at the start of the global financial
crisis without issuing a single bond after receiving IMF aid.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For graphic comparing debt levels within the EU, see
http://r.reuters.com/sem72m
For CEE debt breakdown, double-click on []
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
NO CAUSE FOR CONCERN YET
Romania has rejected all bids at four debt tenders and sold
less than planned at others since May 6, roughly the same time
plans emerged to cut wages by a quarter and pensions by 15
percent.
Investors have questioned whether Romania can push through
such cuts but the government survived a no-confidence vote on
Tuesday and might resume tenders, despite appeals against the
savings.
Neighbouring Hungary saw yields rise 100 basis points across
the curve after government officials spooked investors this
month by comparing the country's debt load with Greece's.
The centre-right Fidesz government's pledge to retain a 3.8
percent of GDP budget deficit target agreed with lenders has
cooled some nerves, though worries remain over planned tax cuts.
Romanian yields are 250 basis points off 2009 peaks at 10
percent, while Hungarian yields are trading at roughly half of
last year's highs.
Czech yields, the lowest in the region, are up due to record
gross borrowing of 280 billion crowns ($51 billion) this year.
Analysts estimate less than a third will be met by July.
While the yield spread on the benchmark 2019 bond has
doubled to 160 basis points over a similar-dated German bond,
the Czech yield is up 50 basis points since mid-April at 4.15
percent but more than 30 basis points below its 2010 high.
Some dealers said investors may have already priced in a
good chunk of the issuance to come, and analysts note the
centre-right's May election win bodes well for fiscal
tightening.
In Poland, yields have been resilient so far: the country is
a clear economic outperformer in Europe and its vast 25 billion
zloty privatisation drive has been successful so far.
By the end of May, it had met about half its record 2010
borrowing needs of 197 billion zlotys ($60 billion).
RISKS AND OPPORTUNITIES
The Greek crisis took hold when investors became unwilling
to accept yields that Athens could afford to pay and analysts
say that is unlikely in central Europe, where Hungary has the
highest debt level at around 80 percent of GDP, well below the
133 percent projected for Greece this year.
But fears of contagion from euro zone's debt crisis will
continue to create volatility and yields are not seen coming
down soon, which poses a risk for economic recovery in the
region, especially in weaker Hungary or Romania.
"If yields rise further, they're passed on to commercial
banks and consumers and the risk is that it derails the
recovery," Morgan Stanley EMEA strategist James Lord said.
However, for bond investors this offers the prospect that
central European interest rates will remain at record lows for
longer, making it potentially attractive to buy into these
markets when volatility cheapens short-term bonds.
Esther Law, emerging markets fixed income strategist at
Societe Generale, said the risks to growth in the region,
compounded by a possible slowdown in its main export market, the
euro zone, meant the best position for investors was in
maturities up to two years, whose prices should benefit most
from official rates being low.
"Slowdown in the euro zone, for me, plays well for the short
end of emerging Europe rates, because that means they'll be
lagging in the hiking cycle," she said.
(Editing by Ruth Pitchford)
