Emerging Europe Scrambles to Contain Crisis Threat

Hungary's government braced for a possible recession in 2009 and Poland's approved a timetable to adopt the euro on Tuesday as ex-communist Europe struggled to contain the spread of the financial crisis.

The head of the IMF urged lawmakers in Kiev to quickly pass legislation to underpin a $16.5 billion rescue package and other governments across the region scrambled to rework their budgets and take other steps to ward off economic collapse.

The Fund also said it was not in talks with Romania -- a country whose debt was cut to "junk" status on Monday -- but said its external environment, or its ability to borrow cash to fuel its economy, was "very difficult." The financial crisis has come as a shock to most countries in Central and eastern Europe, a region of states ranging from those still struggling with fundamental economic problems to those fully integrated in the European Union and euro zone.

Once seen by economists as insulated due to its low exposure to toxic debt, the region shuddered this month as foreign investors dumped assets and fled to developed markets in a selloff that has hammered currency, debt and stock markets.

Hungary, which like Ukraine and Iceland is tapping the IMF for a loan to shore up its finances, said it would modify its 2009 budget to allow for the chance of recession -- the first of the bigger, export-led economies in central Europe to do so.

Prime Minister Ferenc Gyurcsany said the government was expecting the economy to contract by up to 1 percent next year.

Hungarian Finance Minister Jan Veres said: "The Hungarian government considered it worthwhile to assess what a potential worst-case scenario for 2009 can be compared with an optimal or a normal scenario."

Budget Moves  

Governments across the region have slashed economic growth forecasts and expect budget revenues to slide: a bad situation when their ability to borrow more on international debt markets has been squeezed by the global credit crunch.

Hungary's Gyurcsany said the government would reduce its 2009 budget deficit to 2.6 percent of gross domestic product (GDP) from an earlier target of 2.9 percent.

In Romania, where the downgrade on Monday sent the leu currency down 2 percent, Calin Tariceanu's government said it aimed to block a law mandating a 50-percent rise in teachers' salaries ahead of Nov. 30 elections despite threats of strike.

Although the IMF said it was not considering aid for Bucharest, it said it was in close talks with officials there and gave support to the government's plan. "Even before this salary increase became known, public and private financing sources were drying up," the IMF said. "In this setting, the initiative ... may need to be reconsidered."

Latvia, whose credit rating was also downgraded by S&P along with neighbouring Lithuania on Monday, said it would cut its 2009 budget deficit further from its planned 1.85 percent of gross domestic product.

In Bulgaria, another EU state seen vulnerable due to heavy dependence on foreign borrowing, the government slashed its growth forecast to 4.7 percent, from 6.5 percent previously.

But instead of cutting expenses, the government there plans to increase capital spending from a big fiscal reserve by 20 to partly make up for an expected slowdown in foreign investment.

Euro, IMF

Poland's government approved a euro adoption plan under which, according to Polish media, the largest EU newcomer is envisioned joining the ERM-2 waiting room to euro zone entry next spring and swapping its zlotys for euros in 2012.

Prime Minister Donald Tusk's centre-right, pro-EU government believes that adopting the euro as soon as possible will help shield Poland against the kind of financial turmoil that has lopped some 14 percent off the value of the zloty But the eurosceptic opposition is against the plan, increasing the likelihood of a referendum on the issue.

In Kiev, the government issued a statement ahead of a scheduled sitting of parliament, blockaded for a week by protesting deputies, to consider financial measures in conjunction with the IMF bailout plan.

It said Prime Minister Yulia Tymoshenko and IMF Managing Director Dominique Strauss-Kahn had spoken by telephone on Monday.

"The two sides stressed the importance of parliament's approval, as quickly as possible, of key measures to return Ukraine to financial stability, strengthen trust and ease the effects of large-scale external crises," the statement said.

"They agreed that implementing the programme depended on ensuring political stability -- for which a stable government and working parliament are required." The assembly has been blockaded for a week by supporters of Prime Minister Yulia Tymoshenko to prevent any move by her arch rival, Ukraine's president, to proceed with a snap election.

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