* Worst of economic crisis in E.Europe seen having passed
* IMF/EU funds have backstopped region
* Risks remain, but cross-border blowup seen unlikely
* Investors cherry picking, Poland stands out
By Michael Winfrey
PRAGUE, Aug 7 (Reuters) - The worst of the economic crisis
has passed for central and Eastern Europe, and although
countries face continued risks, cash injections from the IMF and
European Union have tamed the threat of region-wide meltdown.
Following panic across the emerging East that started last
year, investors are now shifting from a posture of loss
avoidance to one of trying to cherry pick outperforming assets.
Dangers remain. Analysts said a potential devaluation of
Latvia's currency or an emerging market selloff sparked by a
correction in U.S. stock markets in the fourth quarter could
send currencies and stocks tumbling again.
And with rising unemployment and ballooning budget deficits,
the region's economies are not expected to return to the growth
of 6 percent and more seen before the crisis any time soon.
But, following the injection of tens of billions of euros
into the region by the International Monetary Fund and European
Union, as well as liquidity facilities extended by central
banks, the threat of multiple national bankruptcy, cross-border
banking collapse and region-wide contagion has passed.
"Many bears still refuse to understand that the lender of
last resort has materialised," said Matthias Siller, who helps
manage Barings Asset Management's $1.8 billion emerging European
equities fund.
"The sovereign default and liquidity crunch scenario for
emerging Europe is over. The IMF is there and is pumping in
cash, and if another $5 billion will be needed, another $5
billion will be provided."
LONG SLOG
Following a panicked selloff of assets across central and
Eastern Europe, a rally that began in developed stock markets
and spread to emerging markets in March looks to have firmly
taken hold, analysts said.
Since then, the Polish zloty <EURPLN=> and Hungary's forint
<EURHUF=> have gained about 19 percent, and the Czech crown
<EURCZK=> 15 percent. As the region's only country that may
escape the crisis without contracting, Poland is now shining.
"That would certainly be one of our favourites," said Nigel
Rendell, emerging markets strategist at RBC.
"The zloty has particularly underperformed and it looks like
it's getting back in vogue. We've got it as outperform against
the regional currencies."
The zloty is still down 22 percent from all-time highs of
3.218 per euro hit in July of last year. By comparison, the
crown is down only 8.9 percent, and the forint 14 percent.
Poland can also take advantage of its relatively large
domestic economy that has insulated it from the double-digit
drops in production in export-driven Czech Republic and Hungary.
According to a Reuters poll, the zloty is expected to firm
slightly in six months and gain 6 percent in the next 12 months,
versus a 3 percent gain in the crown. []
INDUSTRY STILL SUFFERING
Few analysts expect the backbone for many of the region's
emerging economies -- industry -- to recover until western banks
pass on central bank liquidity injections to companies and
consumers open their wallets in the EU's richer half.
That has not happened yet. But those schemes, as well as
access to government-backed bonds, have allowed banks with
eastern operations to stave off dangers posed by exposure to
struggling countries like Ukraine, Hungary and Romania, which
have also received IMF and EU financing to avoid meltdown.
Other programmes like Germany's car scrap subsidies have
helped temper a more than 20 percent fall in production seen
earlier this year. Most of the region is expected to return to
marginal growth next year, possibly as early as the first half.
Now players are starting to look for new positions where
they can take advantage of the best performers, and stock
indices have struck out on a stronger footing.
Prague's posted its largest monthly gain in a decade last
month and is up 24 percent since July 1. Exchanges in Budapest
and Warsaw have added 13 percent and 9 percent in that time.
"If you look back six months, very few people were touching
eastern Europe. That confidence has returned very clearly," said
Simon Quijano Evans, chief economist at equity house Cheuvreux.
"It's not a question now of whether (the region) is going to
collapse, but who is going to perform better."
LURKING RISKS
But risks remain. EU members Latvia, Romania and Hungary
still have potentially difficult discussions ahead with the IMF
to get the rest of their billion euro rescue packages.
Those states that have avoided bailouts are also watching
their budget deficits explode to double or triple previous
estimates, a development that is driving up debt levels in the
short term and will probably force painful spending cuts in
around 2011 that could dampen growth.
Unemployment is expected to rise for a year or more after a
recovery begins and wages are stagnating, which can hit growth.
And in the Baltics, analysts say pressure on both Latvia and
other currency board countries to devalue pegs binding them to
the euro may overcome their staunch opposition to such moves.
Still, letting, say, Latvia's peg go would be much less
dangerous than just three months ago, analysts said.
"The consensus view is this: Latvia, when it happens, will
be a one-off effect. The rest of the region will continue to
drag its heels, but no big blowup," said Barclays Capital
emerging markets strategist Koon Chow.
Another potential risk that investors see is the prospect of
a fourth-quarter selloff in U.S. stock markets, which could
prompt another wave of flight from risk around the globe.
"There's a chance that we see a new equities crisis," said
RBC's Rendell. "Earnings numbers have come in better than
expected, but they've proven better because companies are
slashing costs, not because their revenue line is going up."
(Additional reporting by Boris Groendahl in Vienna and Jason
Hovet in Prague; Editing by Ruth Pitchford)
