* Hungarian officials' warnings trigger regional jitters
* Governments still struggling with fiscal consolidation
* Austerity fatigue, political tensions rising
* Conflict between some governments and central banks
By Michael Winfrey
PRAGUE, June 6 (Reuters) - Warnings by Hungary's new
government about the risk of a debt crisis have caused investors
to reassess the safe-haven status of Eastern Europe, and may
fuel more volatility in markets as the region struggles through
economic recovery.
Shunned by the markets during the global financial crisis,
when Hungary, Latvia and Romania were bailed out by the
International Monetary Fund, the European Union's ex-Communist
east has in the past 18 months regained investor trust by
tackling big fiscal and external deficits.
But the region's image suffered a blow last week when two
officials in Hungary's new, centre-right Fidesz government
suggested the country was close to a Greek-style economic
meltdown, sending currencies, stocks and bonds reeling.
Many private economists believe Hungary is far from becoming
another Greece, noting its budget deficit and public debt ratios
are much lower. As recently as last month, Eastern European
government bonds were attracting fund flows from investors
fleeing instability in the euro zone. []
But last week's turmoil illustrated how political change,
popular fatigue with austerity, and tough 2011 budget choices
may make it hard for Eastern European countries to follow
through on their policy commitments.
"Previously people had seen eastern Europe as the place that
had done austerity and made progress. It was seen as relatively
safe," said RBC strategist Nigel Rendell.
"But now that this has resurfaced in Hungary, people will
reevaluate the situation, and they might come to see that
Central and Eastern Europe is not the safe haven that they had
been thinking it was."
Hungary's forint fell more than 2 percent against the euro
on Friday, while Hungarian bond yields surged 40-70 basis
points. The Polish zloty, Romania's leu and the Czech crown fell
between 0.5 and 1 percent against the euro. <CEE/>
Hungary's government tried to contain the damage on
Saturday, saying any comparisons with Greece had been
"exaggerated", and that Fidesz was still determined to hit a
2010 budget deficit target agreed with international donors. But
markets may take months to settle down. []
POLITICS, BUDGETS
EU-IMF bailouts in 2008 and 2009 helped Hungary, Latvia and
Romania avoid potential balance of payments and banking crises,
and halted a free-fall in the region's currencies.
Hard work by governments to slash budget deficits also
helped shield the region from a sell-off in the periphery of the
euro zone when investors dumped Greek, Spanish and Portuguese
assets this year.
But while public debt and deficits compare favourably with
the euro zone's worst-off countries -- Hungary's public debt was
80 percent of gross domestic product last year, against 120
percent for Greece -- the growth outlook is still sluggish, and
may be worsened by budget austerity.
In Romania, the government is set to face a confidence vote
and a general strike this week over austerity steps that include
sacking tens of thousands of public workers. []
Last week the Romanian government rejected all bids in a
bond auction for the third time in a month, because investors
were unwilling to accept yields which it considered reasonable.
The Greek crisis was triggered when investors became unwilling
to accept yields which Greece could afford to pay.
The IMF says Lithuania, which shrank 15 percent in 2009 on
the back of severe state cost-cutting, needs to push through
austerity measures worth 5.5 percent of GDP to hit its goal of a
public sector shortfall of 3 percent in 2012.
But the government will have difficulty doing this after
losing its majority in parliament in March.
Latvia's coalition also lost its majority in March in a
dispute over a plan to hike taxes and cut public pay and
welfare, raising questions about Riga's ability to keep its 7.5
billion euro bailout deal on track ahead of an Oct. 2 election.
"The budget situation is challenging in a number of central
and eastern European countries and the wider European sovereign
debt worries could soon again include worries over public
finances in a number of CEE countries," Danske Bank said in a
research note.
NEW GOVERNMENTS
At present, Poland and the Czech Republic have avoided
serious punishment from markets, but they too face risks.
A surprise victory by Czech centre-right parties who aim to
slash the budget deficit and public debt, which is now half the
EU average at 37 percent of GDP, has boosted markets.
But some analysts warn that a plan to cut the public finance
gap too quickly could hit growth, now projected at around 1.4
percent for this year.
Poland, the only EU state to avoid an economic contraction
last year, is expected to grow about 3 percent in 2010. But the
approach of elections next year, and the lack of clear plans to
cut a budget deficit of 7 percent of GDP, may push public debt
over a constitutional limit of 55 percent of GDP, forcing
painful spending cuts.
Changes of government can cause market jitters even when the
new governments espouse market-friendly policies, in a region
where politicians are relatively inexperienced in democratic
transitions and economic institutions are young.
That may be what happened in Hungary last week. While some
analysts think Fidesz may have been setting the stage to
backtrack on earlier promises of deep tax cuts, inexperienced
politicians appeared to misjudge the impact of their rhetoric on
markets.
Political transitions prompted two bruising confrontations
between governments and central banks this year. Poland's
central bank was embroiled in a spat over how much money it
would contribute to the government budget, while in Hungary,
Fidesz has put pressure on central bank governor Andras Simor to
quit -- a challenge to the bank's independence.
Simon Quijano Evans, an economist for Cheuvreux, said he
expected a rebound in markets on Monday following the Hungarian
government's clarification of last week's statements.
But he added, "Any political communication blunders or
dissonance...will face strong negative reaction especially in
those countries with higher public sector debt/FX
lending/external debt ratios."
(Editing by Andrew Torchia)
