(Recasts to add details, comments)
By Jason Hovet
PRAGUE, Oct 16 (Reuters) - Hungary's forint steadied on Thursday on the back of a European Central Bank pledge to boost euro liquidity in the country, while central European stocks tracked global markets lower as focus remained on bleak growth prospects.
The forint has been knocked about the past week, and lost more than 7 percent at one point on Wednesday when concerns over domestic banks' funding abilities intensified, leading a selloff in the region.
Hungarian banks have a higher proportion of foreign currency borrowing than others in central Europe, and investors have been selling forint-based assets despite government and central bank efforts to assure markets the system is well capitalised.
Hungary's central bank (MNB) said early on Thursday it had signed a deal with the ECB on repurchase transactions which will allow the MNB to borrow up to 5 billion euros [], sending the forint 2 percent higher before the currency pared gains by mid-afternoon.
"It is clearly positive because it reduces the risk of a lack of euro liquidity in the local banking sector, which is important," said Martin Blum, head of emerging markets economics and forex strategy at UniCredit in Vienna.
"But it doesn't change the medium-term outlook that there will be a sharp slowdown in economic growth in Hungary," he added, which pointed to more forint weakening.
By 1241 GMT, the forint <EURHUF=> was bid at 265.05 to the euro, up 0.7 percent from Wednesday's domestic close, and last traded <EURHUF=D2> at 265 per euro, off a two-year low of 272 hit in the past week.
Stock markets fell for the second straight day on Thursday, with losses of 7 percent in Prague <> and Budapest <>, and almost 3 percent in Warsaw <>.
NO ICELAND
Standard & Poor's put the credit ratings of Hungary and Ukraine on review for a possible downgrade on Wednesday due to deteriorating financial sector conditions [].
However, analysts have made clear that while Hungary is more exposed than the Poles, Czechs and Slovaks, it is still seen as more stable than Ukraine, Romania, or Bulgaria and is a different case to Iceland, which is near economic collapse.
In other trade, Poland's zloty <EURPLN=> fell 2 percent to 3.584 against the euro, and the Czech crown <EURCZK=> edged 0.4 percent down to 24.79 per euro.
In Romania, which also has high exposure to foreign credit and where the central bank has intervened in recent weeks, the leu <EURRON=> inched up 0.5 percent to 3.785 per euro.
Serbia's dinar <EURRSD=> and Croatia's kuna <EURHRK=> dipped; both currencies have been hit by heavy demand for euros this month. Serbia's central bank has spent more than 150 million euros this month to stem dinar declines [].
Market falls the last two days followed a rally at the start of the week sparked by world government pledges to shore their banking sectors. However, fears quickly turned to economies that will likely slow deeper than expected.
Most central European economies have grown at a more than 6 percent clip in recent years, but are seen slowing deeply on the back of waning demand from the euro zone, a main trade partner.
A global scramble for cash has also spilled into regional money and bond markets in recent weeks, prompting central banks to introduce new measures at restoring liquidity. Hungary has seen its foreign exchange swap market all but seize up this week, creating a potential problem for the banking system.
Central European government bond markets remained at near standstill as buyers stayed away. The lack of activity has prompted the Hungarian and Czech governments to scale back bond issues this year, along with other measures to lift the market.
Hungary's central bank said on Thursday it had signed a deal with primary bond dealers to boost market liquidity, under which the bank will hold auctions to buy government securities from primary dealers []. Czechs had adopted liquidity boosting measures earlier this week.
Czech market makers have mostly stopped quoting government papers, and dealers worried that a flood of sellers could come to the market as Hungary's market is mainly shut.
In normally more liquid Poland, yields rose tracking losses for the financial sector.
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today in 2008 Czech crown <EURCZK=> 24.793 24.703 -0.36% +6.43% Polish zloty <EURPLN=> 3.584 3.513 -2.02% +0.46% Hungarian forint <EURHUF=> 265.050 266.950 +0.71% -4.82% Croatian kuna <EURHRK=> 7.159 7.155 -0.06% +2.29% Romanian leu <EURRON=> 3.785 3.802 +0.45% -5.72% Serbian dinar <EURRSD=> 82.83 82.678 -0.18% -5.17% Yield Spreads Czech treasury bonds <0#CZBMK=> 3-yr T-bond CZ3YT=RR +26 basis points to 54bps over bmk* 5-yr T-bond CZ5YT=RR +7 basis points to +40bps over bmk* 10-yr T-bond CZ9YT=RR +4 basis points to +47bps over bmk* Polish treasury bonds <0#PLBMK=> 2-yr T-bond PL2YT=RR +35 basis points to +338bps over bmk* 5-yr T-bond PL5YT=RR +25 basis points to +280bps over bmk* 10-yr T-bond PL10YT=RR +24 basis points to +235bps over bmk* *Benchmark is German bond equivalent. All currency data taken from Reuters at 1441 CET. All bond data taken from Reuters at 1019 CET. Currency percent change calculated from the daily domestic close at 1500 GMT.
For related news and prices, click on the codes in brackets: All emerging market news [] Spot FX rates Eastern Europe spot FX <EEFX=> Middle East spot FX <MEFX=> Asia spot FX <ASIAFX=> Latin America spot FX <LATAMFX=> Other news and reports World central bank news [] Economic Data Guide <ECONGUIDE> Official rates [] Emerging Diary [] Top events [] Diaries [] Diaries Index [] (Reporting by Reuters bureaus, writing by Jason Hovet, editing by Mike Peacock/Toby Chopra)
