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By Peter Apps, Political Risk Correspondent
LONDON, Jan 4 (Reuters) - Euro zone debt worries, the
survival of IMF deals in Eastern Europe, elections, protests,
leadership dynamics in Russia and internal divisions in Turkey
could all affect investors in emerging Europe in 2011.
Below are the key political risks to watch.
WESTERN EUROPE'S WOES
For many investors in emerging Europe, the key political
risks are not from within the region from the more established
economies of Western Europe as they struggle to contain the euro
zone debt crisis.
The key issues will be whether the euro zone's most troubled
states, particularly Greece, Ireland, Portugal, Italy and Spain,
can make tough spending cuts and placate bond markets and
whether the bloc can make wider reforms.
If Western Europe does sink back towards recession, a
knock-on effect on exports from emerging Europe could have a
marked effect on economies and assets.
At a two-day summit in December, EU states agreed to create
a crisis fund from 2013 but some market players still worry
there may not be enough money to bail out countries such as
Spain or Portugal if they need it in the coming year.
What to watch:
-- Any renewed crisis in Greece, Ireland or elsewhere are
likely to have a knock-on effect on markets in the emerging EU,
possibly again raising worries over the most troubled states
such as Hungary.
-- Any broader reform of EU treaties, bailout regimes or
bond haircuts will have a particular effect on accession states
such as Poland, the Czech Republic and the Baltics.
IMF, AUSTERITY AND "UNCONVENTIONAL MEASURES"
Emerging European countries were among the first hit by the
financial crisis in 2008, forcing many to turn to the
International Monetary Fund and the EU for bailouts often
accompanied by harsh austerity measures.
While some countries such as Latvia earned plaudits from
Brussels and the IMF for taking the harsh medicine, Hungary's
new Fidesz government is walking a more unconventional path
prompting the collapse of its deal. That has disturbed investors
who worry the pattern might be repeated elsewhere in the region.
Hungary says it must regain its financial independence. It
has not yet released full details of its structural reforms.
Fiscal measures so far have included special taxes on banks and
some corporate sectors and what pension funds described as an
effective re-nationalisation of mandatory private pension
schemes.
The government is poised to change the central bank law,
aiming to pack the Monetary Council with its own candidates in
March when the mandates of four of seven members expire.
Other countries such as Romania are continuing to push
forward with their IMF deals although, like their counterparts
in Western Europe, they face an almost inevitable rise in
strikes, protests and other civil unrest as well as growing
strains within governments.
What to watch:
-- Action by ratings agencies against Hungary or further
"unconventional measures" by the government there could unsettle
markets throughout the wider region. Any perceived movement back
towards the IMF consensus would be taken well.
-- The failure of another IMF deal could hit markets across
the region.
ELECTIONS AND PROTESTS
Latvia's ruling coalition performed relatively well in
elections earlier this year, proving that austerities might not
always prove electorally toxic. In other emerging EU countries,
the pressure of spending cuts is pressuring coalitions sometimes
to the brink of destruction.
Romania's government narrowly survived no-confidence votes
this year over planned cuts, with political uncertainty
repeatedly knocking asset prices.
In the Czech Republic, ties between the three coalition
parties have been strained after all three did badly in upper
house elections. Further tension between the parties could
undermine investor confidence and make budget approval, pension
and health reforms even more difficult.
In Hungary, Fidesz has a two-thirds majority together with
its Christian Democrat allies and has used that clout widely,
stripping the Constitutional Court of its jurisdiction over
matters related to state finances.
Some analysts describe it as an attack on democratic checks
and balances but the government looks set to push ahead with
plans for a new constitution next year.
What to watch:
-- Signs of coalition strains in any emerging European
country with an IMF programme would almost certainly worry
markets. Romania probably looks most in focus, with centrist
Prime Minister Emil Boc likely facing attempts to topple him and
spark a full-blown political crisis.
-- As in Western Europe, particularly widespread protests
could also grab investors' attention, especially if they were
seen blocking or reversing reforms outright.
RUSSIA -- OIL AND LEADERSHIP
In Russia, all eyes will be on the leadership dynamic
between Prime Minister Vladimir Putin and President Dmitry
Medvedev in the run-up to the presidential election in 2012 in
which both could potentially stand.
Putin is by far the dominant member of what Russian
officials call the ruling "tandem" -- with leaked U.S.
diplomatic cables from WikiLeaks describing the younger, shorter
Medvedev as Robin to Putin's Batman.
Most analysts and diplomats expect Putin to return to the
Kremlin in 2012 and believe Russia will be stable while he is in
control, although in the longer term some investors have worries
over such reliance on an individual.
Putin himself says he and Medvedev will make a decision
closer to 2012 as to who is to stand. S
