* Latvia reaches agreement with IMF after wobble
* Lithuania's GDP contracts 22 pct in Q2
* Budgets a risk though some signs outlook improved
(Adds bonds, analyst comment, updates levels)
By Marius Zaharia and Karolina Slowikowska
BUCHAREST/WARSAW, July 28 (Reuters) - Central European
currencies retreated on Tuesday after Lithuania posted a
22-percent drop in economic growth in the second quarter,
underlining the uncertain outlook for the region as a whole.
Currencies had gained earlier in the session, driven by an
upbeat global mood and Latvia's clinching of a deal with the
International Monetary Fund which it hopes will see it through
the worst of a similar contraction. []
While Hungary also cut twice as much as expected off the
premium for holding its forint on Monday, that was also a signal
of generally improved sentiment toward the biggest economy in
the region to be forced to seek IMF aid. []
"We are looking at a retreat today because of Lithuania but
this shouldn't last," said Michal Dybula, regional economist at
BNP Paribas.
"Sentiment is positive, risk appetite is strong. I think the
recent appreciation trend will continue."
Currencies have pursued a rally into a second week, in line
with emerging stocks and bonds, fuelled by rising risk appetite
and a visible improvement in financing conditions after
successful taps of international debt markets by Poland and
Hungary.
The zloty <EURPLN=>, the region's most traded currency, was
0.1 percent down against the euro, the Czech crown <EURCZK=> was
0.1 percent down, while Hungary's forint was 0.5 percent up.
WORSENING BUDGETS
Latvia's volatile political and economic story has been an
important driver for central European markets, as investors
worry about the spillover of a possible currency devaluation.
But it is concerns over how budgets will shape up -- and how
deficits will be financed -- which dominate the agenda for
governments across the region, with evidence growing that the
crisis may yet prompt sharp adjustments elsewhere.
"The recent appreciation trend in the region is sentiment
driven. It is not backed by fundametals per se," BNP Paribas'
Dybula said.
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
[].
The Czech Republic's finance minister was also quoted as
saying on Tuesday that the 2010 budget gap will exceed 200
billion crowns ($11 billion) due to a worsening economic outlook
[].
Such concerns should show up first in the region's bond
markets, which were were largely weaker on Tuesday as investors
awaited a Polish central bank statement on Wednesday that is
expected to hold fire on more rate cuts.
Markets will also eye the bank's statement for signs that,
encouraged by better than expected data over the past month, the
bank will keep rates steady for the rest of the year as the
economic outlook improves.
--------------------------MARKET SNAPSHOT--------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2009
Czech crown <EURCZK=> 25.525 25.503 -0.09% +4.81%
Polish zloty <EURPLN=> 4.184 4.18 -0.1% -1.65%
Hungarian forint <EURHUF=> 269.35 267.92 -0.53% -2.15%
Croatian kuna <EURHRK=> 7.333 7.333 0% +0.44%
Romanian leu <EURRON=> 4.209 4.211 +0.05% -4.62%
Serbian dinar <EURRSD=> 93.413 93.416 0% -4.21%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond CZ2YT=RR +11 basis points to 140bps over bmk*
4-yr T-bond CZ4YT=RR 0 basis points to +162bps 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 +9 basis points to +370bps over bmk*
5-yr T-bond PL5YT=RR +12 basis points to +300bps over bmk*
10-yr T-bond PL10YT=RR +10 basis points to +276bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1647 CET.
Currency percent change calculated from the daily domestic
close at 1500 GMT.
(Reporting by Reuters bureaus, writing by Karolina
Slowikowska; editing by Patrick Graham)
