IMF pressures emerging Europe as turmoil eases

By Michael Winfrey - Analysis

PRAGUE (Reuters) - A break in the economic turmoil in emerging Europe has let the International Monetary Fund wield more stick on its demands for belt-tightening and shift away from the more merciful line it took at the start of the crisis.

Cautious to avoid the political upheaval that marred the Asian and Argentina crises, the IMF initially focused on getting cash to countries near the brink of bankruptcy like Hungary and Latvia with a view of containing a wider meltdown.

But now that the threat of immediate regional collapse has receded and markets have stabilized, the Fund has taken a country-specific tack and is leaning on bailout recipients it sees more likely to tackle belt-tightening reforms.

Analysts said the result would be a patchwork of deals where the neediest will buckle down on public sector deficits.

But those with factors like other financing options or political constellations resistant to outside pressure will either get leniency or forgo deals altogether.

That means the Washington-based lender of last resort will hold back agreed loan tranches from the likes of Serbia and Latvia if they do not tame their public deficits, but Ukraine is likely to get a pass until its January presidential vote.

"Why is it coming through? Probably because the global environment is better, allowing the IMF to focus on country- specific challenges, and therefore allowing them to call on different countries to do what they need to do," said Koon Chow, a strategist at Barclays Capital.

"By the same token, there is a little inconsistency with the IMF, seen in the treatment of, say, Latvia versus Ukraine."

Turkey, without a serious fiscal or financing crisis, will most likely forego any deal unless a reversal in the global market rally slams shut its alternative route to funds.

TURNING THE SCREW

Backed by a tripling of its lendable resources to $750 billion, the Fund threw lifelines to sinking central and Eastern European states last year, saying the priority was to stem the economic collapse and nurture recovery.

In that spirit, it let Hungary and Latvia overshoot agreed budget deficit ceilings when their economies showed they would contract by a worse-than expected 6 and 18 percent this year.

But as the threat of crisis eases and lending revives the Fund has demanded bailout recipients stabilize finances.

The EU gave a green light to Latvia last week for a 1.2 billion euro tranche of aid, but the IMF has held back judgment on whether cuts -- 20 percent to state salaries and 10 percent to pensions -- have been enough for it to release more funds.

It also froze a loan tranche to Serbia until it brings public sector deficit under control, and it held off approving a 1.2 billion euro loan for Bosnia.