* Hungary downgrades highlight CEE risks
* Region's political turmoil clouds reforms outlook
* IMF-led bailouts underpinning economies somewhat
By Michael Winfrey
PRAGUE, March 31 (Reuters) - Hopes that international
bailouts would put a floor under investor confidence in central
and eastern Europe have been chilled this week after Hungary's
credit ratings were cut to one notch above "junk" status.
Despite help from the European Union EU and International
Monetary Fund (IMF) for EU members Hungary, Romania and Latvia,
the region risks a financing meltdown which could spread to
neighbouring countries.
That risk has sparked plans for some of the deepest spending
cuts since the fall of communism, but with some governments
already toppled, doubts persist over how far any state can go in
cuts to socially sensitive programmes such as pensions or child
benefits.
A rise in global stock markets has helped cushion the
region, as it has restored some risk appetite among investors,
but analysts warn that if that fades, central and Eastern Europe
are in for a jolt.
"If the nascent recovery in global markets runs out of
steam, political risk will only add to the renewed downward
pressure on the region's currencies," wrote Neal Shearing, an
analyst at Capital Economics.
Hungary's forint, the Polish zloty and the Czech crown have
eased 2-3 percent against the euro over the past 10 days.
Only Romania's leu has gained in that time following
Bucharest's agreement of a 20 billion euro IMF/EU bailout deal.
Since Hungary's prime minister said he would step down on
March 21, his successor has urged swift and painful
cost-cutting, including a chop to child care allowances, a
freeze in family allowances, a tax on minimum wage and scrapping
a year-end bonus to pensioners and state workers.
In Latvia, where the cabinet fell following violent January
protests, new Prime Minister Valdis Dombrovskis aims to cut
state salaries by a fifth, on top of 15 percent already pledged
to the IMF.
His aim is to keep the country's budget gap under 7 percent
of GDP.
But such pledges face tough public and political opposition
and failure to meet IMF-agreed targets could lead to the flow of
funds being shut off, as seen in non-EU neighbour Ukraine.
RISING DEFICIT
As much still rests on executing promised spending cuts and
reforms, analysts said EU and IMF piecemeal efforts to shore up
flagging countries had been effective but only to a point.
They have come in lieu of a wider EU-led package to underpin
the EU's eastern flank, although the bloc has doubled a crisis
fund for non-euro zone states to 50 billion euros.
Moody's and Standard & Poor's cuts for Hungary and their
negative outlooks marked the second such move since Budapest
secured a $25 billion bailout last year.
Both Latvia and Romania have been cut to "junk" status by
S&P.
At the heart of those assessments is a growing doubt over
whether they can finance gaping current account deficits built
up over a decade when borrowing from abroad fuelled a boom in
imports which outpaced exports.
"This should be a strong wake up call for all political
parties to push ahead with desperately needed reforms, as the
alternative will be a further strong depreciation of the
forint," said Simon Quijano Evans from Calyon unit Cheuvreux
regarding Hungary's downgrade.
Collapsing growth has recently narrowed deficits in the
Baltics and Balkans as spending especially on foreign goods fell
away but no so in Hungary, where an even sharper collapse in
euro zone demand for its exports meant the gap widened last
quarter.
"That is certainly a concern because Hungary already has a
big fiscal gap and a big package from the IMF," said Maya
Bhandari, economist at Lombard Street Research. "Its external
financing needs are still growing rather than falling. I remain
quite concerned about the region as well."
Hungary is expected by many analysts to shrink by more than
5 percent. Latvia's government announced on Monday its economy
could contract by almost 15 percent and neighbour Lithuania is
braced for a fall of at least 10 percent.
Lombard's Bhandari expects even the region's strongest
economy, Poland, to post zero growth at best this year, below
the 1.2 percent forecast by a Reuters poll of analysts.
According to Cheuvreux's Quijano Evans, the EU, IMF, and
others have now set aside up to 130 billion euros for the region
hoping to backstop the stragglers.
"This is clearly addressing the issue very, very strongly,"
he said. "And the EU is fully behind this."
Last week, the IMF said it had created a new flexible credit
line for well-run emerging market countries under which they
could tap funds with no strings attached. Analysts say those
states could include Poland or the Czech Republic.
(Reporting by Michael Winfrey; Editing by Jason Neely)
