CORRECTED - FACTBOX-Five risks to watch for in the eastern EU

(Corrects amount of newly agreed Hungarian budget ceiling to 3.9 percent of GDP, not 4.6 percent)

By Mike Winfrey

PRAGUE, Aug 11 (Reuters) - A string of less bleak data in central and Eastern Europe suggests the financial crisis-driven economic downturn across the region has started to ease.

But issues ranging from ballooning budget deficits to a grim demographics outlook still pose a range of short-term and long-term risks to Europe's emerging east. Following is a description of some challenges still facing the region:

ECONOMIC RISKS REMAIN

The risk of multiple national bankruptcies and a chain reaction in cross-border banking failures in emerging Europe has subsided since the International Monetary Fund threw lifelines to Latvia, Hungary, Romania, Ukraine and others.

But a continuing economic slump and higher social spending have caused budget revenues to fall and public deficits to jump.

A spike in company bankruptcies and higher jobless rates are also expected to help drive up the level of non-performing loans to 10-20 percent, putting strain on banks.

Most governments have managed to tap international debt markets, while foreign-owned banks have benefited from liquidity-injecting measures in their home countries, which has allowed credit to continue to expand, although very slowly.

But risks remain. Economists say that, if the crisis lasts longer than expected and foreign demand for products made in industry-heavy east Europe does not resume, it could cause currency volatility, widespread default, and a repeat of the investor flight that threw the region into turmoil last year.

PAINFUL BUDGET CUTS

The most immediate problem for countries in central and Eastern Europe is also the one expected to create the biggest headaches down the road, as ballooning budget deficits today make it harder for governments to rein in their spending later.

Already some of the deficit limits set by the IMF have had to be loosened, and others are under acute strain.

Hungary has renegotiated its budget deficit target to 3.9 percent of GDP, and Romania has been given the nod to shoot for a 7.3 percent ceiling, against a previous 4.6 percent target.

The IMF has said it will allow Latvia's fiscal gap to expand to 8.5 percent of GDP. But this will mean cutting $1 billion from spending that has already been slashed, and the prospect threatens to tear apart the governing coalition.

Last week, Lithuania said it might have to turn to the IMF or seek other international assistance if it has trouble financing its budget deficit. [ID:nL3633597]

The Czech Republic's deficit is set to more than triple from last year's level. Poland is scrambling with ad-hoc measures including privatisations and big dividends from state-owned firms to boost its revenue and avoid taking on debt that will trigger painful cuts if it climbs past 60 percent of GDP.

Some economists predict a decade of lower growth across the region.

BALTIC WORRIES

Latvia and its Baltic neighbours have been the hardest hit throughout the crisis, and posed the greatest risk of regional contagion.

IMF support appears to have diminished the prospect of a Baltic state defaulting on international obligations -- as long as local politicians can push through austerity measures without their coalitions collapsing.

The international community has backed Latvia's decision to keep the lat at its peg to the euro.

But analysts say there is still a big risk that a contraction of as much as a quarter in Latvia's economy this year and continued tight credit will force it to devalue.

That could spark a chain reaction in currency board regimes in Lithuania, Estonia and Bulgaria.

It could also put pressure on floating currencies such as the Hungarian forint, Romanian leu, Czech crown and Polish zloty, although analysts say the IMF and EU efforts to prop up the region have significantly reduced that risk.

All the other countries maintaining currency boards have rejected the idea of devaluing. But a recent poll indicated that, although two-thirds of Latvians want to maintain the peg unchanged, more than 60 percent believe devaluation is likely.

POLITICAL STRAINS, ELECTIONS

Economists say that, once the crisis subsides, most countries should start to tackle big structural reforms, including overhauling pensions and healthcare and reorganising how budgets are created. But politics will make that difficult.

Latvia, Hungary and Romania, among others, have made spending cuts to prevent balance of payments crises, but analysts say these were largely superficial responses.

Latvia's government, which has slashed pensions by 10 percent and public salaries by 20 percent, is at risk of collapse after its health minister threatened to quit last week and said hospitals could go bankrupt by September or October.

Meanwhile, Polish Prime Minister Donald Tusk's government has resisted raising taxes and cutting spending ahead of 2010 presidential elections in which he is expected to run.

A looming parliamentary election in the Czech Republic in October has also made it difficult for analysts to forecast the future of fiscal policy there.

Hungary's right-of-centre Fidesz party is expected to win polls there in April or May of next year and has said it will focus on boosting growth rather than cutting spending, a move that will most likely delay structural reforms.

Latvia is due for a general election in late 2010, and Estonia in 2011. Lithuania's next vote will be in October 2012.

DEMOGRAPHICS

One of the largest longer-term risks to central and Eastern Europe is demographics -- ageing populations mean fewer young people are entering the workforce, which translates into lower revenues to pay for higher social security and healthcare costs.

To make matters worse, participation in the workforce is low across the region. In Poland it is just 59 percent, compared with more than 70 percent in many western EU states.

No country in central and Eastern Europe has fully reformed its pension system to address the crisis, and some including Hungary's are at risk of collapse if nothing is done.

Hungary is not alone. In a 2006 report, the European Commission said the working-age population in the EU will decrease by 48 million by 2050. That means the EU will have two workers for each person over 65, compared with four to one now.

According to the report, all EU countries fall below the fertility rate of 2.1 children per woman required to maintain a stable population. But the bloc's eastern wing has some of the lowest rates, with the Czechs, Hungarians, Slovenes, Slovaks, Lithuanians, Latvians and Poles all registering below 1.3.

Both the Czech Republic and Hungary are expected to see their populations fall to around 8.9 million from just over 10 million each now. Poland's population is expected to fall to 33.7 million, from 38 million now.

The resulting deterioration in long-term public finances means overhauls of pensions, healthcare and workforce participation will become ever more pressing. For five eurozone risks to watch for, click [ID:nL7421677] For five Middle East risks to watch for, click [ID:nL775585] For five African risks to watch for, click [ID:nLB12591] (Additional reporting by Boris Groendahl and David Mardiste; Editing by Peter Apps and Kevin Liffey)