EMERGING MARKETS-Hungary, Poland suffer on euro zone
* Zloty hits 26-mth low, forint 2011 low
* Emerging stocks hit 3-week lows
* Local bond yields starting to rise
By Carolyn Cohn
LONDON, Sept 13 (Reuters) - The euro zone debt crisis and concern about local foreign currency loan exposure hit the larger emerging European economies on Tuesday, taking the zloty and forint to new lows, and broader emerging stocks to three-week lows.
Greek debt insurance is starting to be quoted upfront, a sign of extreme distress for the debt, as conflicting reports about the possibility of China buying Italian debt caused market uncertainty on Tuesday.
Emerging Europe has strong trading links with the euro zone, and the European Bank for Reconstruction and Development said on Monday that the euro zone crisis was increasingly hitting the region.
"The Greek and Italian sovereign debt issues are still at the forefront, especially concerns over the impact on the European banking sector. Correlations are very high," said Di Luo, CEEMEA fixed income strategist at HSBC.
"The internal dynamics of South Africa and Israel may be different but at a time like this, their curves move together."
The MSCI emerging equities index fell 0.75 percent to three-week lows and the Thomson Reuters emerging Europe index dipped.
Emerging sovereign debt spreads tightened by 3 basis points to 358 bps over U.S. Treasuries, but remain close to their widest levels since May 2010.
Hungarian assets continued to suffer on concern about a proposed domestic policy of loan repayments at a favourable FX rate to Swiss franc loanholders, which would dent Hungarian bank earnings.
Hungarian and Polish consumers have heavy exposure to the strong franc.
The forint hit the year's low against the euro , bringing losses in the past week to 3 percent, and one-week lows against the Swiss franc .
Hungarian bank OTP shares fell more than 6 percent to their lowest in more than two years after being suspended on Monday.
The zloty hit a 26-month low against the euro after Deputy Finance Minister Ludwik Kotecki said the currency was likely to weaken further, following a 5 percent drop this month.
Hungarian and Polish debt insurance costs hit fresh April 2009 highs in the five-year credit default swap market, according to Markit.
The Czech crown also briefly touched its lowest in more than three months against the euro .
Local bond markets have rowed back from recent stellar gains, on increasing worries about a Greek default.
JPMorgan recommends selling South African 10-year bonds, with its analysts saying in a note "the fiscal outlook has become less constructive...investors are significantly overweight and inflow momentum is waning...price responsiveness to global risk appetite has changed for the worse".
(Additional reporting by Sebastian Tong)