PREVIEW-Austria deficit seen higher on banks, economy

* Finance Minister to present budget in parliament Tuesday

* Has said plan of 2.5 pct deficit not realistic anymore

* Economists see up to 4 pct in 2009, up to 5 pct in 2010

* Crisis, possible E.Europe bank bailouts seen as risk

By Boris Groendahl

VIENNA, April 20 (Reuters) - Austrian Finance Minister Josef Proell is expected to present parliament a grim budget outlook on Tuesday as the economic crisis and capital injections in Austrian emerging Europe exposed banks weigh on state finances.

Proell has said that his plan to limit the budget deficit to 2.5 percent of gross domestic product this year was no longer realistic because Austria's economy would contract more than expected, but has declined to be more specific. [ID:nLF505750]

The head of Austria's state debt commission, which advises the government on budget policy, told Reuters on Monday he now expects the deficit to rise to 3.5 to 4 percent this year and to 4.5 to 5 percent in 2010, mainly because of the banking package.

The deficit was only 0.4 percent last year.

"What is certain is that we'll make a record jump in 2009," said Bernhard Felderer, who also heads IHS, one of Austria's two big economic research institutes.

According to a report in magazine Profil, the OECD in a draft report on Austria even predicts a deficit of 7.7 percent in 2010. An OECD spokesman said the numbers were from a working document and would be reviewed before publication in July.

About 6 billion euros ($7.8 billion) in capital injections in banks including Erste Group Bank (ERST.VI) and Raiffeisen Zentralbank -- a number likely to rise as other banks draw money -- were the main driver in the debt hike, Felderer said.

"That's already 2 percent of GDP and maybe something will come on top of that," he said. "However, we believe that stabilising the banks was essential, and that the crisis would have become much worse without that."

As a result, Austria's debt will rise to 65 percent of GDP this year and to around 70 percent next year, Felderer said -- both still below the euro zone average, forecast to be at 76 percent in 2010 according to the European Commission.

Market concerns that Austrian banks' exposure to emerging Europe -- which stands at least 70 percent of GDP -- may require a massive government bailout have driven up the price of Austrian government debt relative to German debt in past months.

Ratings agencies have confirmed Austria's triple-A debt rating, however, dismissing concerns of a downgrade like that of euro zone fellow Ireland -- let alone the prospect of an Iceland-style Alpine default. [ID:nLN511910] [ID:nLK494197]

Economics Nobel laureate Paul Krugman sparked a renewed media furore last week when he said in offhand remarks at a briefing for foreign journalists in New York that Austrian banks' exposure in the East looked "pretty scary".

But the market did not react on Krugman's comments. Austrian 10-year debt spreads AT10YT=RR hit a record high of 140 basis points in March but eased ever since to stand at 84 basis points on Monday -- still high by historic standards. (Reporting by Boris Groendahl; Editing by Andy Bruce)