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By Michael Winfrey
VIENNA, Sept 29 (Reuters) - Winding down bloated public debt
levels will crimp recovery for the European Union's eastern
members, policy makers said this week, but Hungary's early moves
on reform mean it could outshine its neighbours.
The worst for the region's economies, they said, appeared to
be over after a collapse in western demand and flight of
investors that crushed growth and led to a string of
international bailouts.
Thanks to the vast public outlays used to combat the global
downturn, growth has picked up in the strongest countries,
Poland and the Czech Republic, and other states are expected to
follow suit by late next year.
The region's lifeblood -- foreign financing -- is even
starting to return. But central banks and governments remain
cautious and are looking ahead at how they can unwind huge
fiscal expansions without jarring their shaky economies.
Hungarian Deputy Central Bank Governor Ferenc Karvalits told
Reuters Central Europe Investment Summit that while there were
encouraging signs from the euro zone, policymakers had to be
aware the recovery was still fuelled by fiscal stimulus.
"The hard question is what happens when the fiscal and
monetary impulses are taken away," he told the summit, held in
the Reuters office in Vienna.
"On the global level, there is a chance there will be a
shortage of capital which would cause further deleveraging
processes, which would also influence growth outlook."
Analysts have upgraded forecasts for most of the region due
to positive indicators in the euro zone, although European
Central bank Governing Council Member Ewald Nowotny told the
summit on Monday 2010 euro zone growth would be sluggish.
PAIN AHEAD
Hungary was the first EU state to grab an International
Monetary Fund-led lifeline last year, and was forced by its
minders to cut back government spending and enact reforms
including a consumption tax boost and a higher retirement age.
Those and other painful moves have come at a time when
unemployment is rising and the economy is expected to shrink
nearly 7 percent this year and almost 1 percent in the next.
But the emergency measures have also helped reverse
imbalances and may give Hungary a chance to rebound earlier.
Karvalits said the economy would take off in 2011.
"We project negative growth in 2010, but in 2011 we project
3.5 percent growth," he said.
That would beat the forecast performance of countries that
did not come as close to the brink. The Czech central bank's
vice governor, Mojmir Hampl, told the summit on Monday the
recovery there would resemble an asymmetric "W", with a second
low point, less deep than the first one, around mid-2010.
Hampl, like Karvalits, said the biggest risk to growth would
be if the recovery in the region's biggest export destination --
the euro zone and particularly Germany -- did not gain speed.
He also said pre-crisis growth levels of 5+ percent would
not return soon. "My suspicion is that if the economies do
return to growth, the potential will be lower than prior to the
crisis."
The Czech government approved a deal last week to reduce the
planned 2010 fiscal deficit to 5.2 percent of gross domestic
product (GDP) from 7.5 percent. Ministers expect that would
slice enough off GDP to cause a modest 0.3 percent contraction.
The Czech economy should then grow 2.2 percent in 2011, it
expects, though that does not assume any fiscal tightening.
POLISH DECISIONS
Ratings agency Moody's said on Tuesday the deep fiscal
deficits made any sovereign ratings upgrades or even changes to
positive outlooks unlikely any time soon.
"The governments have to get their fiscal (positions) in
order. We don't expect to be moving over to positive in the next
few years," said Moody's Vice President Kenneth Orchard said.
In Poland, the only EU country to expand in each quarter
this year, the central bank sees growth returning to 2 percent
"only in 2011".
Meanwhile unemployment is rising and credit remains tight.
On Tuesday, the Polish central bank said it expected public
debt to exceed 55 percent of GDP, the first of two thresholds
which under current rules would likely trigger cutbacks in later
budgets and wipe up to several percentage points off growth.
Orchard said politics could be a factor for Poland's credit
standing too, with a presidential election next year. "It is
limiting upside for the rating, in that it is preventing fiscal
adjustment coming sooner than it would otherwise," he said.
(Reporting by Michael Winfrey; editing by Patrick Graham)
