Fears that a contagious currency sell-off could rip through faltering Eastern European economies prompted Brussels to tell finance ministers and central bankers from the region yesterday to end loose talk that could inflame a crisis of confidence in its prospects.

The warning was aimed at Poland, Hungary, Romania and the Czech Republic, where steep falls in their currencies are threatening to drag down eurozone economies such as Austria, which have huge investments in the new EU states.

The sense of mounting alarm across Europe was not limited to nations outside the single currency, with the announcement that the Republic of Ireland, Greece, Spain, France and Malta, plus the non-euro member Latvia, were being placed into EU monitoring of their excessive deficits. Some far exceed the agreed limit of 3 per cent of GDP.

This led Peer Steinbrück, the Ger- man Finance Minister, to say that Berlin was prepared to act to prevent damage to the euro from market speculation over the risk of a debt default by Ireland, Greece or Spain.

Fears of traders that a euro member state could default on soveriegn debt has led to a sharp jump in the spread between the interest rate yield on the government bonds of countries that look very exposed and that on the debt of those seen as sound, such as Germany.

Joaquín Almunia, European Econ- omic and Monetary Affairs Commissioner, risked further currency falls in Eastern Europe by voicing his frustration at the behaviour of countries in the region: “I am concerned about the volatility of exchange rates in EU countries with floating regimes and by the possibility that some public statements have accelerated this.

“I would ask the economic and financial authorities of the EU mem- ber states to be careful when they make public statements. Because markets are very nervous and sometimes do not understand very well.”

His comments followed a statement by Donald Tusk, the Polish Prime Minister, on Tuesday that his Government was prepared to intervene to defend the zloty if it fell to five to the euro, as it reached 4.92.

Poland’s central bank governor also questioned the Government’s aim to join the eurozone in 2012. As the Government opened talks on the exchange-rate mechanism, Slawomir Skrzypek said: “There are no economic reasons to enter ERM-2 this year. We are not ready. The zloty exchange rate is not stable enough.”

The slide in the Czech crown was halted after the central bank signalled a rate rise while Ferenc Gyurcsany, Hungarian Prime Minister, asked the central bank to explore methods to hold up the forint, which has lost 14 per cent this year.

Ukraine’s troubles seem to be accelerating out of control after the central bank said the economy contracted 20 per cent in January year-on-year, with a huge 34 per cent fall in industrial production. Yesterday, Mr Almunia said Brussels is ready to co-ordinate a pan-EU response to stop fin- ancial contagion from Ukraine and the rest of Eastern Europe from causing a banking crisis in the eurozone.

Eastern European economies are suffering from widespread euro borrowing by governments, companies and mortgage-holders, leading to increasing monthly repayment pressure, as well as high inflation that led to huge public sector pay increases.

Moody’s and Standard & Poor’s, the ratings agencies, said this week that the economic downturn in Eastern Europe could be worse than thought and imbalances there could cause problems for Western banks.

Mr Almunia said the rules of the EU’s stability and growth pact would continue to be applied, despite the recessionary pressures and the huge sums pumped into stimulus packages that are raising deficits.

He signalled a lenient approach would be taken to countries such as Britain, which is being monitored for excess deficit, that take longer than a year to get their deficits back below 3 per cent. He said that the commission would wait until March 25 to recommend how much time countries in breach of EU deficit limits should have to come back into line and signalled it would be generous with the amount of time given.

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