BUCHAREST/WARSAW: Hungary's forint neared an all-time low on Thursday and pressure on other central European currencies intensified as investors worried about the likely impact on the region of the escalating sovereign debt crisis in the neighbouring euro zone.
The Czech crown hit a fresh 16-month low against the euro, losing over 1 percent on the day, while the zloty shed 0.7 percent on fears the crisis could constrict much-needed lending to the region by western European banks.
"With the global risk backdrop and the situation in Western Europe, Eastern Europe is the most vulnerable emerging market around," said Sebastien Barbe, the head of emerging market strategy at Credit Agricole CIB.
"The developments in Italy fuel fears of deleveraging in western banks and CEE countries are most dependent on the financing coming from there."
Political and economic turmoil in Italy has spurred fears of a possible break-up of the euro zone, with borrowing costs for Europe's third biggest economy at unsustainable levels and the 17-nation currency bloc unable to avoid a bailout.
EU sources told Reuters that German and French officials have discussed plans for a radical overhaul of the European Union involving stricter rules for euro zone members which not all of them might be willing or able to live with.
The euro gained slightly versus the dollar on Thursday and Italian bond yields stabilised at around 7 percent on signs that political deadlock may be easing and Rome paid less to borrow at a one-year debt auction than many had feared.
Hungary's forint nevertheless fell to a fresh 32-month low, burdened by lingering concerns about a possible sovereign credit rating downgrade and the impact on the banking system of the government's foreign currency mortgage repayment scheme.
"The whole region is weakening but the forint fell more," a Budapest-based FX dealer said, adding that a big player had started off-loading Hungarian bonds and selling the forint in afternoon trading.
By 1536 GMT the forint was down 1.5 percent to the euro, trading at 314.8 after earlier reaching as low as 315.50. Dealers said the next resistance level for the EUR/HUF would be 317.45, its all-time low hit on March 6, 2009.
"I just can't see that the forint could improve even if the European sentiment improves," said a Budapest-based trader. "You can conclude that the cause of the market falls is domestic ... The foreign currency loan repayment scheme weighs on markets."
A Reuters poll released on Thursday however showed the forint leading a possible currency rally in the region with a 10 percent expected gain over the coming 12 months, provided the euro zone crisis abates.
Hungarian bond yields rose 20-30 basis points. Earlier, Hungary's debt agency AKK cut its regular auction of one-year bills nearly in half, selling a total of 23 billion forints, two weeks after a sale of the same instrument was scrapped.
CROWN, ZLOTY DOWN AS WELL
The crown -- the region's best performing currency this year with just a 2.7 percent drop against the euro compared to some 11 percent for the zloty and forint -- fell 1.1 percent to 25.701 per euro.
"The crown has been behind the whole year, and is now just chasing the others. There is talk of short Czech positions against (other) CEE (currencies) being put on," a Prague dealer said.
Poland's zloty fell 0.8 percent.
Poland celebrates its independence day on Friday and dealers said the absence from the market of the central bank and state bank BGK could cause the currency to suffer steep losses should investor sentiment deteriorate further.
The Polish central bank has intervened three times on the spot market to defend the zloty since September and BGK is often seen in the market as it exchanges the euros received from EU's structural funds.
Poland sold more than 8 billion zlotys ($2.5 billion) in bonds at a switch tender on Thursday, with investors scrambling to get their hands on the paper despite the impact on the zloty from the euro zone crisis.
Yields on Polish debt were little changed on Thursday.
Elsewhere, Romania's leu was 0.3 percent higher after data showing inflation rose to an annual 3.6 percent in October from 3.5 percent in September.
"I do not think we will see a significant impact on the exchange rate in the short term. For now, the external environment seems to weigh more," said ING's Vlad Muscalu.
Stocks in the region were down, with Warsaw leading the decline with a 1.8 percent loss, underperforming Europe's main stock indexes.