WRAPUP 1-Crisis bites in EU's east, Latvia turns to IMF

* Latvia seeks financial help from IMF, EU

* Hungary says may start ERM-2 entry talks before end 2009, faces recession

* Polish output growth slumps, euro retreat eyed

By Krisztina Than

BUDAPEST, Nov 20 (Reuters) - The financial crisis worsened for central and eastern Europe on Friday with Latvia becoming the second European Union member to seek help from the IMF and Hungary facing a severe recession.

Hungary said on Thursday it may start talks before the end of next year on joining the pre-euro Exchange Rate Mechanism-2 (ERM-2) as it seeks a shield for its currency, but first it must find ways to lift its economy out of a slump.

Other countries in the region are also struggling, with ratings agency Moody's warning Poland may slip into a technical recession as data showed growth of industrial output all but slowed to a halt last month.

Latvia, which has already hit recession and had to take over its second-largest bank, said it had asked for financial help from the European Commission and the International Monetary Fund.

The country's capitulation gives credibility to fears that others in the EU's former-communist eastern wing will be forced to reach out for aid as a global downturn takes hold.

Budapest's Finance Minister Janos Veres said on Thursday Hungary's budget deficit will fall, allowing the country to start negotiations before the end of 2009 about ERM-2 entry.

The government has cut its target for the budget deficit to 2.6 percent of gross domestic product (GDP) next year, as it faces up to tough spending cuts that are part of its deal for $25 billion in aid from the IMF and the EU.

"Hungary will meet the ... (budget) condition of ERM-2 entry (next year) and I hope the European Commission's forecast (in November 2009) will reflect that," Veres told Reuters.

"And then Hungary may start talks before the end of 2009 about ERM-2 entry."

Poland also signalled it might be ready to push back its planned euro zone entry beyond 2012, even though Polish Prime Minister Donald Tusk insisted the project was still crucial.

RISKS AHEAD

Analysts said Hungary, which abandoned several euro target dates in the past and has no official target date now, may be able to enter the ERM-2 exchange rate mechanism, the anteroom to the euro, in 2010, but there were uncertainties.

"I can see it happening in 2010, but there are so many risks: what will happen globally in markets, how long the recession will last," said JPMorgan analyst Nora Szentivanyi.

"It (ERM-2) gives a certain protection as the ECB has to defend that trading band ... but authorities will consider very carefully whether it is not too early to let Hungary in."

Analysts said that with inflation and the budget deficit falling, Hungary may get close to meeting the conditions for joining ERM-2 next year. [ID:nLK339856].

"Yes (ERM-2 talks may start in late 2009) if by then markets calm down," said Zsolt Kondrat, analyst at MKB.

"The most important change can be that in the future there will likely be a political will for joining, while economic players will probably very strongly argue for entry," he said.

Poland's Tusk argues the financial crisis was reason for swift euro adoption as this would provide greater stability for Poland's economy, but the opposition there strongly disagrees.

ECONOMY IN TROUBLE

After averting crisis with the help of a $25.1 billion IMF-led rescue package, Hungary, which has long been the basket case of the region, faces two key challenges -- financing its external debt and lifting its economy out of recession.

The government expects the economy to contract by 1 percent, but some analysts say the recession could be more severe, as demand falls in export markets while domestic demand will drop on a fall in real wages and sharply slowing bank lending.

Industrial output data in Poland, by far the largest of the EU's eastern European members, also slumped to just 0.2 percent in October.

"The decision of several large firms (including steel mills, car factories and chemical companies) to cut production in the coming months strengthens our view that Poland is likely to face a substantial economic slowdown in 2009," Citigroup said.

Banks will struggle to find financing next year and their problems will likely worsen the recession, Hungarian Banking Association Chairman Peter Felcsuti told a conference.

Hungary's key interest rates stand at 11.5 percent after a 300 basis point emergency hike last month, and the bank is not seen to start cutting rates before the first quarter of 2009.

"At the moment, it's obviously financial stability which is the most important factor," Szentivanyi said.

(Reporting by Krisztina Than; editing by Patrick Graham)