Oct. 29 (Bloomberg) -- Emerging Europe’s widening public deficits and debt levels have put the region’s credit ratings under pressure even as access to market financing improves, Fitch Ratings said.

“Concerns over public finances have moved to centre stage,” said London-based Fitch’s Edward Parker, head of emerging Europe sovereigns, in a report published today. “Major challenges remain due to the scale of the negative shocks to hit the region, the costly legacy of the crisis, notably rising public debt ratios; and the uncertain ‘exit’ from the crisis.”

Emerging Europe has suffered a deeper shock from the global credit crisis than Latin America and Asia after the region’s governments, often because of restrictions imposed by international bailouts, were unable to provide adequate stimulus to boost demand and after exports and investment slumped. The region’s European Union members have seen their deficits swell in excess of EU guidelines, forcing them to delay euro adoption targets.

Budget deficits in the region will average 5.9 percent of gross domestic product this year compared with 1.1 percent in 2008, Fitch estimates. The shortfalls will narrow to 4.6 percent next year, it said. The average debt to GDP ratio will rise to 36 percent by the end of 2010 from 23 percent at the end of 2007, Fitch said.

Downgrade Warnings

“Failure to implement credible medium-term fiscal consolidation could lead to rating downgrades,” Fitch said. “In many countries, social pressures and elections will make it harder to implement austerity measures. This is fertile territory for political shocks.”

Countries relying on International Monetary Fund-led support, including Hungary, Romania, Ukraine, Serbia and Latvia, must remain committed to their bailout programs to ensure sustainable recovery, Fitch said.

“Failure to stick to program conditions poses additional risks to macroeconomic stability,” the rating service said.

Fitch predicted a deeper economic contraction for the region this year, and raised its growth outlook for 2010. Even so, “weak investment, rising unemployment, moderate capital inflows and credit growth, fiscal consolidation and a rebuilding of balance sheets point to a subdued recovery.”

The rating service sees average expansion of 2.6 percent in 2010, compared with a previous forecast for 1.5 percent “owing to the unwinding of the deeper 2009 contraction and more supportive global conditions,” it said.

Economic Outlook

The region will contract 6.1 percent this year, compared with a June estimate for a 4.6 percent slump, Fitch estimates. That compares with an estimated 0.1 percent contraction for emerging markets as a whole, it said.

Fitch on Oct. 6 warned Latvia that it faces a rating downgrade if it fails to push through “painful” adjustments needed to reduce its budget deficit and comply with the terms of an international bailout. The rating service ranks Latvia’s long-term foreign-currency debt BB+, one notch below investment grade. The rating carries a negative outlook.

Ukraine’s IMF program is at “serious risk” of veering off track ahead of the country’s next review in November, Fitch said on Oct. 14. The risk has increased after “policy discipline has eroded even further,” it said, affirming Ukraine’s long-term foreign and local currency Issue Default Ratings at B, five notches below investment grade, with a negative outlook.

Central Europe

The ratings company said last month that Poland, Hungary and the Czech Republic will suffer deteriorating state finances as the global crisis is pushing up debt levels.

Poland’s general government shortfall will stand at 5.5 percent of GDP in 2009 and 6.3 percent in 2010, Fitch said, probably delaying euro adoption beyond Fitch’s previous forecast of 2013.

Polish debt may rise to 56.3 percent of GDP next year, widening more than 9 percentage points compared with the end of 2008, and breaching a limit of 55 percent set by budget laws, Fitch estimates, calling for “a credible plan” to reduce the deficit as early as 2011.

The Czech Republic’s general government deficit will be at 6 percent of GDP this year and next, “a sharp deterioration” compared with the 2008 deficit of 1.4 percent, the service said. Czech state debt is set to have widened by 10 percentage points to 40.8 percent of GDP by the end of next year from 2008, Fitch estimates.

Hungary, which last year needed an IMF-led loan to avoid default, will post a budget deficit of 3.8 percent of GDP in 2010, according to the fund, which Fitch said is “realistic.” Even so, government debt is set to rise 10 percentage points by end-2010 from last year, to 82.5 percent of GDP, according to Fitch.

To contact the reporters on this story: Tasneem Brogger in London at tbrogger@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: October 29, 2009 06:01 EDT