* Latvia reaches agreement with IMF after hesitation
* Forint resumes firming after surprise 100 bps rate cut
* Worsening budgets a risk; dealers see correction ahead
(adds fixed income, background, updates prices)
By Marius Zaharia
BUCHAREST, July 28 (Reuters) - Central European currencies
firmed on Tuesday, helped by a Latvia-IMF agreement and a still
upbeat global mood which limited the impact of a surprisingly
deep rate cut in Hungary.
Regional currencies pursued a rally into a second week, in
line with stocks and bonds, fuelled by rising risk appetite and
a visible improvement in financing conditions after successful
taps into international markets by Poland and Hungary.
Hungary's forint edged down briefly on Monday after the
central bank surprisingly chopped 100 basis points off its
benchmark rate [] to 8.5 percent, but resumed
firming on Tuesday, to lead gains in the region.
At 0848 GMT, the forint <EURHUF=> was 0.8 percent stronger,
while the Polish zloty <EURPLN=>, the Czech crown <EURCZK=> and
Romania's leu <EURRON=> were 0.2-0.3 percent up on the day.
"Hungary's cut for now does nothing else but to highlight
the improved CEE sentiment," one dealer in Bucharest said. "But
this doesn't mean the forint will not suffer from the lower
yield in the longer run, especially when a correction happens."
Analysts say worsening budget outlooks weigh on central
Europe because more fiscal tightening would prolong recession.
Investors were relieved late on Monday to get confirmation
that Latvia had reached an agreement with the International
Monetary Fund on policy measures aimed at freeing up fresh funds
for the troubled Baltic economy, after the largest party in the
coalition hesitated in backing the deal [].
Latvia's volatile political and economic story has been an
important driver of central European markets, as investors worry
about a spillover effect from a possible currency devaluation.
Hungarian bonds held on to Monday's gains after the rate
cut, when yields dropped 10-20 basis points.
Polish bonds were stable and the market waited for a rate
decision on Wednesday, when the central bank is widely seen
holding rates at 3.5 percent []
Regional bourses gained up to 1.5 percent on Tuesday, with
Prague's <> index climbing over 1,000 points for the first
time since October 2008.
WORSENING BUDGETS
Dealers warned the rally might be getting ahead of itself,
especially with rising unemployment and growing loan defaults
seen on the horizon.
"Volumes are really struggling," said Martin Stuchlik, a
Patria Finance trader. "All global markets are ready for a
correction ... I don't think the fundamentals of the markets
have changed that much to see such a move higher."
Hungary had to seek IMF help last year after years of
running big budget deficits, though it now targets 3.9 percent
of gross domestic product (GDP) in 2009, compared with Romania's
4.6 percent and Czech Republic's 5.5 percent.
In Poland, a deputy finance minister was quoted on Tuesday
as saying public debt may top 55 percent of GDP in 2010 and
force Warsaw to adopt restrictive budgets in coming years
[].
On Monday, Romania signalled it would ask the IMF to raise
its public deficit ceiling and Bulgaria said it would cut up to
$1.5 billion in spending to reach a balanced budget
[].
In Czech Republic, the finance minister was quoted as saying
on Tuesday that the 2010 budget gap will exceed 200 billion
crowns ($11 billion) due to a worsening economic outlook
[].
----------------------MARKET SNAPSHOT-------------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2009
Czech crown <EURCZK=> 25.422 25.503 +0.32% +5.24%
Polish zloty <EURPLN=> 4.17 4.18 +0.24% -1.32%
Hungarian forint <EURHUF=> 265.75 267.92 +0.82% -0.83%
Croatian kuna <EURHRK=> 7.326 7.333 +0.1% +0.53%
Romanian leu <EURRON=> 4.199 4.211 +0.29% -4.4%
Serbian dinar <EURRSD=> 93.36 93.416 +0.06% -4.16%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond CZ2YT=RR 0 basis points to 129bps over bmk*
4-yr T-bond CZ4YT=RR +1 basis points to +163bps over bmk*
8-yr T-bond CZ8YT=RR +11 basis points to +273bps over bmk*
Polish treasury bonds <0#PLBMK=>
2-yr T-bond PL2YT=RR -1 basis points to +361bps over bmk*
5-yr T-bond PL5YT=RR 0 basis points to +288bps over bmk*
10-yr T-bond PL10YT=RR -2 basis points to +265bps over bmk*
Hungarian treasury bonds <0#HUBMK=>
3-yr T-bond HU3YT=RR +12 basis points to +686bps over bmk*
5-yr T-bond HU5YT=RR +20 basis points to +606bps over bmk*
10-yr T-bond HU10YT=RR +19 basis points to +495bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1148 CET.
Currency percent change calculated from the daily domestic
close at 1600 GMT.
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(Reporting by Reuters bureaus, writing by Marius Zaharia;
Editing by Ruth Pitchford)
