* Poland exchanges EU fund to prop up zloty
* Poland says starts ERM-2 talks with ECB
* Hungary calls for "unconventional means" to protect forint
* Czech cbanker warns of potential rate hike
* Click on [] for take-a-look on policy response
By Michael Winfrey
PRAGUE, Feb 18 (Reuters) - Poland's central bank exchanged
European Union funds for zlotys to halt a violent slide in its
currency on Wednesday and other of the bloc's newcomers rushed
to staunch an acceleration in a months-long regional selloff.
The Union's executive Commission voiced worry over the huge
drop in the Polish zloty, the Czech Crown, Hungarian forint, and
other currencies, which has caused some firms to fail and hit
millions across eastern Europe who have borrowed in euros and
Swiss francs.
Spooked by that heavy dependence on foreign borrowing -- a
millstone that has forced Hungary, Ukraine, Latvia and Serbia to
turn to International Monetary Fund for rescue -- and plunging
growth, investors have dumped stocks, bonds and currencies.
The zloty has lost a third of its value against the euro,
the forint 23 percent, and the Czech crown 17 percent since last
summer. Stock markets across the region have lost up to 25
percent this year, piling up on top of steep losses in 2008.
That trend picked up pace this week following reports from
ratings agencies and economists that the economic crisis will be
worse than previously expected in emerging Europe and imbalances
there could cause problems for Western-owned banks.
After losing 6 percent on Monday and Tuesday against the
euro, the zloty gained a third of that back after the government
said it had started talks with the European Central Bank on
joining the pre-euro ERM-2 exchange rate mechanism.
Its Finance Ministry also said it had sold part of the 3.2
billion euros it has available in EU development funds on the
open market to help boost the zloty.
Raffaella Tenconi, Chief Economist at Wood & Company, said
an acceleration of investors dumping assets and a spate of
negative comments from media and economists had combined to
create the risk of a vicious circle. Policymakers were now
trying to counter the slide but they had yet to hit bottom.
"In the coming months, the pressure is still towards
depreciation," she said. "But I think we are coming closer to
the peak of this crisis, and I still see scope for a gradual
recovery in the second half."
Underlying the selloff is a collapse in exports and industry
and mounting job losses. Many economists have abandoned the idea
that any country will escape recession.
Danske Bank said the economies of Poland, the region's
"least affected" economies -- Czech Republic and Slovakia --
could shrink by 2 to 5 percent in 2009, while the Baltic states
and Hungary could fall by more.
RATE MOVES, IMF
EU Commissioner for Economic and Monetary Affairs Joaquin
Almunia said he was worried about the currency slides and urged
policymakers not to make the situation worse with misguided
statements.
"I am also concerned by the possibility that some public
statements have accelerated this evolution," he said.
In Romania, central bank Governor Mugur Isarescu said
Bucharest may want to seek a deal with the International
Monetary Fund and Serbia's said Belgrade could boost its $520
million IMF package to $2 billion.
Hungary's government pushed for a joint EU bank aid package
and Prime Minister Ferenc Gyurcsany asked policymakers to
explore "unconventional methods" to staunch bleeding on the
forint, which hit a record low of 310 per euro on Tuesday.
The fall poses a sticky problem for Hungary, which had to
grab a $25 billion lifeline from the International Monetary Fund
last October. Sixty percent of its mortgages -- about 2.374
trillion forints ($9.77 billion) -- are in foreign currencies.
Those borrowers and other citizens and firms with foreign
currency loans are now facing a spike in monthly payments,
putting pressure on the banking sector and the economy.
A top Czech rate setter warned of interest rate hikes in
response to the falling crown, which has lost 6 percent since
the bank's last meeting. With a boost from the rising zloty, the
comments helped pushed the crown higher 2 percent on the day.
Polish and Hungarian rate setters have also indicated
currency weakness could limit interest rate cuts despite output
slamming into reverse due to a collapse in euro zone demand.
(Reporting by Reuters bureaus; Editing by Victoria Main)
