By Karolina Slowikowska and Kuba Jaworowski
WARSAW, June 5 (Reuters) - Latvia's economic crisis risks
spilling over into other countries in eastern Europe and the
international community needs to provide more support for the
small Baltic state, a Polish central banker said on Friday.
Latvia, its economy badly hit by the global crisis, is
struggling to avoid a currency devaluation that would hammer
heavily exposed Swedish banks and reignite worries over the
wider region's prospects.
Its prime minister reaffirmed on Friday that his government
was not planning any devaluation of the lat.
"There is a threat that the situation in Latvia may spill
over into the region," Dariusz Filar, a member of the Polish
central bank's Monetary Policy Council, told reporters on the
sidelines of an economic conference in Warsaw.
"This situation is a challenge that requires a reaction on a
broader scale than just Latvian, there is a need for more
international assistance."
Ex-communist eastern Europe has suffered a big outflow of
funds since the global crisis struck last year as investors shun
markets perceived as too risky.
Addressing the Warsaw conference, held to mark the 20th
anniversary of the fall of communism in Poland, EU Monetary
Affairs Commissioner Joaquin Almunia held out little prospect of
early relief for the region.
"Beyond the current short-term liquidity risks, the region
is also likely to face more difficult and volatile funding
conditions in the coming period," Almunia said.
Filar's comments on contagion shaved 0.8 percent off
Poland's zloty currency, traders said. Hungary's forint, seen as
a proxy for risk in the region, was down 0.7 percent against the
euro and the Czech crown fell 0.2 percent.
CONCERNS
Economists echoed Filar's concerns, noting that in Latvia
and other countries in once-booming eastern Europe many
households and companies hold debt in euros or Swiss francs.
"There's a problem with paying loans in Latvia and I guess
such a problem is likely to appear in other CEE countries," said
Bartosz Pawlowski, senior emerging market strategist at BNP
Paribas in London.
"That is why the zloty, forint and crown have not taken
advantage of the better sentiment on global markets."
In Riga, Latvian Prime Minister Valdis Dombrovskis said: "We
have just to put this talk (about a devaluation) to one side. We
are just getting ourselves all worked up and creating emotion."
The lat has been stuck at the weak end of its band against
the euro, the level at which the central bank intervenes to
support it, for about two weeks due to the devaluation rumours.
Ratings agency Fitch has said Latvia needs to clinch an
agreement with the European Union and the International Monetary
Fund on fresh funding in order to protect its currency peg.
On Thursday, the European Commission urged Latvia to make
further cuts in public spending, offering little hope Riga would
quickly receive more funds to tackle the crisis.
Latvia's economy is set to contract by 18 percent this year
and unemployment is soaring.
Investors fear Latvia will finally be forced to abandon the
peg despite firm official denials, a move that would increase
pressure on the other Baltic republics of Estonia and Lithuania
which also operate currency boards.
Filar is the first Polish policymaker to raise the risk of
regional contagion from the Latvia crisis. Poland has generally
been keen to stress the strength of its own economic
fundamentals and to play down risks of contagion from outside.
IMBALANCES
European Central Bank Governor Jean-Claude Trichet told the
Warsaw conference that Poland had built up fewer macroeconomic
imbalances, allowing it to weather the global crisis better than
many of its peers in ex-communist Europe.
Trichet also reaffirmed that countries queuing up to join
the euro zone had to implement sound macroeconomic policies and
structural reforms.
"Only after the elimination of major macroeconomic
imbalances and when sufficient convergence has been achieved can
countries expect to reap the full benefits of euro area
membership," he said.
Poland, the largest ex-communist EU member, wants to join
the euro in 2012 but economists say this date is unrealistic.
Economists expect Poland -- whose zloty currency floats
freely -- to muster a small sliver of growth this year and to
avoid recession, thanks in part to a weakening currency which
has made Polish exports more competitive.
Underlining eastern Europe's economic travails, Hungary
reported on Friday an annual fall of 27.1 percent in industrial
output in April, based on preliminary unadjusted data.
Like Latvia, Hungary has reached out for IMF-led aid
packages to plug its large financing gaps.
(Additional reporting by Dagmara Leszkowicz and Mike Winfrey)
(Writing by Gareth Jones; editing by Patrick Graham and Stephen
Nisbet)
