C.Europe Currencies Dip As EU Summit Disappoints

European Monetary Affairs Commissioner Joaquin Almunia said on Monday the EU was doing a huge amount to support its eastern members.

Emerging European currencies plunged on Monday, led by a 2.5 percent drop in the Hungarian forint, after a summit of European Union leaders rejected a mass bailout plan for the region.

The dismissal of a Hungarian call for a 180-billion euro plan dashed hopes of a swift move toward a broader deal to underpin the EU's eastern wing and steady nerves that have hit even its better-balanced economies.

Central Europe's currency, debt and stock markets have been battered by concerns about weakening growth and banks and their heavy reliance on external funding -- despite some policymakers' efforts to distance themselves from weaker neighbours.

The Poles and Czechs have watched a euro zone recession and the credit crunch slam the brakes on their economies but contend they are still far better off than Hungary and Latvia, which have sought bailouts from the International Monetary Fund.

European Monetary Affairs Commissioner Joaquin Almunia said on Monday the EU was doing a huge amount to support its eastern members, but said more may be needed.

He said Monday's falls were not a result of weekend decisions. Analysts said the lack of a unified response had hurt markets and that investors would not differentiate between states until the region secures a broader aid package to underpin confidence.

"Markets, especially currencies, will continue to push for a strong policy response and so we must wait and see what next steps are taken at an EU level," Nomura emerging markets economist Peter Attard Montalto said in a note.

STAGGERING

EU leaders also held out the prospect on Sunday of faster euro zone entry for single currency aspirants, but analysts said that offered little solace to investors who fear the region's woes could also spill over to the West.

The most immediate trouble is a collapse in industry due to consumers snapping their purses shut in richer Western EU states. PMI purchasing managers' data showed the Czech and Polish manufacturing sectors ticking up slightly in January but contracting significantly overall.

Polish gross domestic product data also showed the economy grew 2.9 percent year-on-year in the fourth quarter, better than expected although analysts said the slowdown would deepen in the region's largest economy.

"We are still very much at the stage where every month forecasts for 2009 are being revised and the 2010 outlook becomes bleaker," said ING analyst Agata Urbanska.

The sliding currencies also threaten hundreds of thousands who borrowed in euros or Swiss francs and now face skyrocketing loan payments, while in Poland firms are struggling under the weight of currency options contracts made last year when the zloty was around 50 percent stronger than now.

Analysts also fear countries like Latvia and Bulgaria that operate currency boards may have to devalue, which could push many borrowers towards loan default and undermine banking.

On Monday, Latvian prime minister-designate Valdis Dombrovskis said 2009 would be a fight to avoid the state going bankrupt as the economy worsens and social tension rises.

Latvia's central bank said it spent 40 million euros on buying lats last week, the first time since a December IMF deal, while the outgoing government warned its budget deficit would near 10 percent of GDP without further spending cuts.

EMERGING MARKET WORRIES

Investors also cut riskier emerging market positions as financial sector worries were fuelled by a huge rights issue from HSBC and news the U.S. government was set throw a fresh lifeline to troubled insurer AIG..

The forint sank to 307.2 per euro by 1311 GMT, down 2.5 percent from Friday's closing level but still off its all-time low of 310. The Polish zloty lost 1.7 percent to 4.751 per euro and the Czech crown shed 1 percent to bid at 28.37 per euro.

The weaker currencies hurt government bonds, with yields continuing to tick up. Romania's leu outperformed on speculation the central bank may intervene, dealers said.

Stocks weakened, mirroring losses in Western Europe due to the financial sector fears. Prague lost 1.6 percent while Warsaw nudged lower. Banks came under pressure after Morgan Stanley cut several price targets, saying it remained cautious on the region.

The zloty has shed 13.4 percent this year and a third of its value versus the euro since hitting record highs last summer. The forint has lost 14.2 percent in 2009, while the crown is off 5.7 percent and the leu 6.7 percent.