* Emerging EU faces long slog to recovery
* Fiscal, banking, market challenges may stall growth
* Buoyed by risk appetite, markets also face uncertainty
* Politics complicate fiscal reforms as elections approach
By Michael Winfrey
PRAGUE, Sept 25 (Reuters) - The European Union's eastern
wing faces a long slog out of the economic crisis and the jury
is still out on how it will negotiate the minefield of fiscal,
banking, and markets challenges ahead.
The worst is probably over for a region once dubbed "the
sub-prime of Europe", where a boom driven by western bank loans,
exports, investment, and consumer spending slammed to a halt and
caused steep contractions in almost every country.
The region has been pulled back from the brink by global
policymakers' success in beating back the worst of the financial
crisis and restoring liquidity to markets.
Following a surge in global risk appetite, investors have
poured back into emerging EU markets. But factors that drove the
region's pre-crisis boom may be dead for years to come and the
question is which, if any, of a number of potential time bombs
could prompt further convulsions and which will prove duds.
"It may well be that we are entering a period of low or zero
growth, a state that may qualify as a 'prolonged recession',"
Thomas Mirow, the president of the European Bank for
Reconstruction and Development, said on Wednesday.
The EU's emerging states face weak demand for their exports,
rising unemployment, and a banking sector still reeling from a
scare halted only by massive injections of state cash by the
world's biggest economies.
A string of elections and talks over bailouts from the EU
and International Monetary Fund will also complicate governments
efforts to deal with a jump in budget deficits and public debt
while also promoting growth.
Can governments wind down their fiscal overhangs, without
killing recovery? Will the resurgence in demand lift them from
the mire of recession? Can banks turn the loan taps back on? And
how will markets react?
More than a dozen policymakers, bankers and corporate
officials will discuss these questions and more at the Reuters
Central and Eastern European investment Summit in exclusive
interviews in Vienna, Warsaw and London from Sept. 28-30.
STABILITY?
Most analysts say sentiment data shows much of the region on
the cusp of recovery after a breathtaking contraction that has
caused its worst hit economies -- Latvia, Lithuania -- to shrink
by almost a fifth.
Currencies across the region have largely clawed back from
steep losses at the start of the year. Budapest's bourse has led
a regional rally by climbing 57 percent since January, and bond
yields there and elsewhere have fallen dramatically.
But economic fundamentals are still tenuous and, rather than
a steady climb, analysts expect a slow return to solid growth.
Better off countries like Poland and the Czech Republic must
try to unravel fiscal deficits that could jump to more than 6
percent of GDP next year due to a fall in tax revenues and
rising social costs.
Hungary, Romania and other bailout recipients must do the
same, while ensuring belt-tightening does not kill recovery.
And all of this must take place ahead of a series of
presidential and parliamentary elections that have clouded
prospects for deep structural reforms as politicians try to
avoid being linked to unpopular budget cuts and tax hikes.
"The region is still facing an uphill battle," Capital
Economics economists Roger Bootle and Jonathan Loynnes wrote in
a research note. "We expect risk appetite to wane over the
course of next year as the pace of recovery in the global
economy starts to disappoint."
Another threat is in the banking sector, where rising
unemployment and corporate and private defaults mean the bad
debt cycle will peak only next year and push average
non-performing loans to some 15 percent on average.
A meltdown of the Western-dominated sector is no longer
expected, since parent banks can tap stability packages and
international financial institutions have come to the rescue.
But lenders are expected to take a long time to push bad
loans off the books and rebuild reserves, a process that will
delay any return to lending practices that once fuelled growth.
"This will remove the turbocharging of economic growth that
Hungary, Romania, Ukraine, the Baltics and the like enjoyed,"
UBS analysts wrote in a recent note.
(Additional reporting by Boris Groendahl; editing by Patrick
Graham)
