* IMF to hold off on austerity demands until recovery clear
* Fund pushes medium-term fiscal plans
* Unravelling deficits must start in 2011, politics a risk
* Latvia seen conceding reforms, Romania, Ukraine risky
By Lesley Wroughton and Michael Winfrey
WASHINGTON/PRAGUE, Sept 22 (Reuters) - The International
Monetary Fund will wait for a clear global rebound before it
demands more austerity from bailed-out countries, and when it
does it will focus on medium-term plans rather than quick cuts.
Rather than demand too much and fuel public outrage as in
the Asian crisis, the Fund is staying more moderate, and
economists said markets will do part of the persuading as they
punish competing countries that neglect structural reforms.
The Fund emerged last year after a decade of diminishing
relevance to snatch east European countries from the brink of
disaster, pumping billions of euros into Latvia, Hungary,
Romania, Serbia, Ukraine and other states.
Although it has pushed for eye-watering cuts in a few cases
where it sees no alternative, it has learned from the public
backlash it encountered in last decade's Asia crisis and aims to
nurture growth rather than just demand harsh belt-tightening.
Analysts say the strategy carries risks due to political
wrangling ahead of a string of elections that could slow reforms
the emerging states need to catch up with the richer West.
But with growth expected to plummet this year by at least 6
percent in most bailout recipients -- and as much as 18 percent
in Latvia -- the IMF is waiting for clear signs of recovery.
"We are very cautious about trumpeting 'this is the end of
the slump, now the recovery is coming,'" Marek Belka, director
of the IMF's European department, told Reuters last week.
"Don't expect us to announce: 'Now is the time to turn
around'. The decision is made by individual countries and
conditions are so different."
Market watchers say the approach will continue to support
markets across emerging Europe but investors will punish
governments that do not show willingness to rein in deficits.
SPIRALLING DEFICITS
Belka said the Fund was keeping a close eye on the recovery
in western Europe and also saw potential for Eastern Europe to
recover at a faster rate once the crisis ends.
"We could then hope for more visible improvement of the
fiscal position," said the former Polish prime minister.
Until then, the IMF has allowed bailed out states to hike
budget gaps from earlier targets after it became clear the
crisis was much worse than expected.
Although it pushed Latvia to cut pensions by 10 percent and
state wages by 20, it let it raise its public deficit this year
to 10 percent of gross domestic product. That is double an
original plan for 5 percent and more than triple the 3 percent
Riga must achieve to complete its aim of joining the euro zone.
The Fund let non-EU member Ukraine raise its deficit ceiling
to 6 percent, from a previously targeted balanced budget. It has
also allowed similar moves in Hungary, Romania and Serbia.
Recently the IMF has become more vocal about how governments
should be thinking about exit stratgies, making it clear that
once the recovery was self-supportive they should start laying
out medium-term fiscal plans that removed any concerns by
markets about countries' solvency.
Just last week, it welcomed Turkey's medium-term economic
framework but voiced concern that the plan did not include
measures to tackle spending pressures.
"What the IMF and the EU will make clear is this is a
temporary approach that will last 1, 2 or maybe 3 years," said
Simon Quijano Evans, CEE economist at Cheuvreux.
"But the message will crystallise that the next stage is one
of consolidation that will require credible mid-term fiscal
plans from all governments."
The danger, economists said, is that some political parties
have used the breathing room to jostle for position ahead of a
series of elections over the next year.
Such manoeuvring was behind problems in Hungary, where
reluctance to halt the spiralling deficit eventualy led to huge
cuts in spending that choked growth in 2007.
Last week in Latvia, parliament struck down a law to raise
taxes. Romania's opposition has challenged the government to a
confidence vote over IMF-prescribed wage reforms that have met
rising social tension ahead of a Nov. 22 presidential election.
And in Ukraine, President Viktor Yushchenko has accused the
government of his rival Yulia Tymoshenko of uncontrollable
spending ahead of a Jan. 17 presidential election.
"The IMF is stuck between a rock and a hard place," said
Neil Shearing of Capital Economics. "It's basically got to
strike a balance between being accommodative, not being too
draconian on the one hand, and not inducing moral hazard."
CREDIBILITY, RISK
Belka said other factors influencing tightening would be
countries' ability to finance deficits and, for ex-communist EU
members, an obligation to bring budgets in line with the EU's
Maastricht criteria, part of their obligation to adopt the euro.
Governments will also face harsher external factors like
investor scrutiny, which should prompt bailed-out countries to
issue mid-term fiscal frameworks to boost their standing when
they eventually return to international markets.
"You'll have different governments competing on capital
markets," said Quijano. "You'll have the triple As crowding out
the double As, in turn, the single As and then the corporates.
That's the next stage."
Investor sentiment towards the region has risen since
January. Credit default swaps, an instrument to insure against
default on debt, had fallen for Ukraine by more than half to
1,200 basis points, from 3,000. Latvia's were down to 549, from
more than 800 in January, and Hungary's were at 220, from 352.
Agata Urbanksa, senior economist at ING in London, said
Latvia was the most likely to tackle belt-tightening. Dependent
on the IMF's help to pay state wages, it has no other choice.
Hungary also appears to have political support for fiscal
reform, while Romania and Serbia -- not as dependent on aid now
that global markets had stabilised -- were more uncertain.
"But my biggest doubts are about Ukraine," Urbanksa said.
"Politicians there have proven for the last five years they
have no interest in being logical in any way or doing much for
the sake of the country."
(Writing by Michael Winfrey; editing by Stephen Nisbet)
