Hungary spoils CEE party

With Poland's government coalition seemingly falling to pieces, politics in Poland is adding to investors' unease in the region after last week's violent protests in Hungary.

Analysts say Hungary's riots highlight the growing risks for investors in the region. Until recently the CEE had been a darling of international investors bargaining on growing asset prices, as countries in the region neared eurozone entry.

"For Central Europe as a whole, politics is a headwind and something that's worrying for longer-term investors," said Martin Blum, head of emerging markets at Bank Austria CA-IB. "Throughout 2006 it's been the case that we had a general backtracking of [euro accession] timings for the region."

The riots in Hungary followed leaked statements by the country's Prime Minister, Ferenc Gyurcsany, that his party had lied about the budget in order to win last April's general elections. Despite promising tax cuts, Gyurcsany has increased taxes and cut benefits by some $4.6 (zł.14.4) billion in an effort to reduce Hungary's budget deficit, which will reach 10.1 percent of GDP this year, the highest rate in the EU.

Adding to growing worries about the region's finances, the head of the Czech Republic's central bank last week expressed doubts about his country's aspirations to join the eurozone in 2010. In Slovakia, some fear a coalition that includes leftist and far-right parties could scuttle that country's goal to adopt the euro by 2009.

"I think the party is not totally over but it's definitely become a less happy party," said Lars Christensen, senior analyst at Danske Bank in Copenhagen.

Despite the instability, the region has yet to see spending rise significantly. Economic growth is healthy, reaching five percent per year in Poland and six percent in Slovakia and the Czech Republic.

In the long term, the consensus is that these countries will adopt the euro eventually, as new EU members are all required to join the eurozone. Now the only question is when. (Reuters)