* Lat hits highest since mid-March on IMF loan hopes
* Jitters over devaluation remain, Baltic CDS jump
* Latvian overnight lending rates hit new record high
* Emerging equities index falls 1 pct
By Paul Lauener
LONDON, June 4 (Reuters) - The Latvian lat and other Eastern
European currencies rose on Thursday on expectations an IMF/EU
loan deal might stave off Latvian devaluation pressures, which
have spooked investors and sent lending rates soaring.
The lat rose to its highest since mid-March against the euro
as currency dealers speculated the International Monetary Fund
might agree to release another tranche of a previously-agreed
loan to Latvia.
Jitters remained, however, and Latvian credit default swaps
and overnight lending rates jumped after a sovereign debt
auction flopped on Wednesday.
"Latvia is the main driver for all the eastern European
currencies right now, but we could see some regional easing of
pressure if the government and the IMF reach an agreement on
fiscal issues," Gaelle Blanchard, emerging markets strategist at
Societe Generale in London, said.
An IMF statement is expected later on Thursday. The EU
issued a statement earlier on Thursday urging Latvia to tighten
public finances.
The lat rose as far as 0.7074 <EURLVL=>, moving away from
the 0.7098 level at which the central bank intervenes to support
it.
However, the Latvian interbank overnight lending rate rose
to a new record high of 25 percent <LVLOND=>.
Latvia's five-year credit default swaps (CDS), used to
insure debt against default, rose to 721.1 basis points
mid-price from a close of 675, according to CDS monitor CMA
DataVision. Latvian CDS have risen 120 bps from a week ago.
Lithuanian CDS jumped over 30 bps to 481.9 while Estonian
CDS rose nearly 15 bps to 366.3.
Poland's zloty <EURPLN=> and Hungary's forint <EURHUF=> rose
0.32 percent but remained at the lower end of recent ranges.
"(Latvia) is a factor that continues to weigh on CEE, in
particular the forint, the risk proxy for the region, and the
zloty, given the strong trade links with the Baltics," said
analysts at RBC in a client note.
"Ultimately, other fixed FX regimes in Lithuania, Estonia
and Bulgaria may go the same way, prompting renewed selling of
CEE assets."
Some Latvia watchers, including a former prime minister,
have said a Latvian devaluation was inevitable since the
government drew up a budget that foresaw a 9 percent budget
deficit and an 18 percent shrinkage in GDP.
Both Latvia's central bank and Prime Minister Dombrovskis
said that a devaluation would be harmful to the country and
repeated support for the currency peg.
Analysts say any devaluation is likely to be in the order of
25-30 percent.
Emerging European stocks rose slightly in line with
currencies, stabilising from sharp falls the previous day,
although the global benchmark MSCI emerging equities index
<.MSCIEF> fell 0.9 percent.
Emerging sovereign debt spread movements slowed, narrowing
2 bps to 441 over U.S. Treasuries after widening 11 points the
previous day (EMBI+) <11EMJ> <.JPEMBIPLUS>.
Hungary's <> index rose 0.64, with Polish stocks
<> rising 1.74 percent and Romania's <> up 1.13
percent.
Russia's <> index rose almost 1 percent, tracking a $1
gain in oil, after sharp falls on Wednesday in both crude and
Russian stocks.
(Additional reporting by Carolyn Cohn; Editing by Toby Chopra)
