CEE MARKETS-Leu recovers from record lows as S&P maintains Romania's rating

PRAGUE, Oct 5 (Reuters) - The leu retook some ground on Monday following a fall to record lows, as Romania avoided a rating downgrade from S&P amid a months-long political crisis that poses risks to needed budget deficit reduction.

Ratings agency S&P maintained Romania's rating at 'BBB-/A-3' in a review late on Friday, citing expectations that the country will successfully form a government that will adopt a credible budgetary framework for 2027-2028.

The no-change decision will turn focus again to Romania's attempts to put together a new government after Prime Minister-designate Siegfried Muresan lost a vote of confidence in parliament last week.

President Nicusor Dan has said he would nominate a new prime minister by Monday.

"Romania's president is expected to hold another round of consultations with political parties, after which he is likely to nominate a new candidate to form the next government, this time with the backing of the PSD party," Erste Group Bank said.

The leu had gained nearly 0.5% from Friday's domestic close to trade at 5.3250 to the euro by 0821 GMT.

The move, while modest compared to the types of gains peers in central and eastern Europe will often make, put the leu on course for its biggest one-day rally since July.

The currency, usually tightly managed by the central bank, fell to as low as 5.39 per euro last week amid worries the political stalemate would hurt its rating, which sits at the lowest rung of investment grade.

CURRENCIES SHAKE OFF EURO PLUNGE

Analysts in a Reuters poll last week forecast the leu to recover more ground in the coming months, with the median forecast putting it back on the strong side of 5.30 per euro in six months. Gains were also seen among other central and eastern European currencies.

Elsewhere on Monday, the Polish zloty inched 0.1% lower and Hungary's forint gained 0.2%. The Czech crown was steady, holding just above a five-month low.

Currencies were largely unfazed by the sharp fall in the euro, which is the region's main reference currency. The euro has come under pressure from concerns about France's ability to rein in its budget deficit.

Those worries have also sharply widened the spread between French and safe-haven German Bunds — something that has helped bonds in central Europe.

On Monday, Romania's 10-year bond was bid with a yield of 7.22%, down 42 basis points from Friday. Shorter-dated Polish bond yields also fell around 7 basis points, tightening their spread with German paper.

This week, markets will focus on central bank rate meetings in Poland and Romania, with neither tipped to shift policy this time.

"The (Polish) government's resumption of the Lower Fuel Prices program has reduced concerns about rising inflation in the coming months and reduced the likelihood of rapid interest rate increases by the Monetary Policy Council," Polish group Bank Millennium said.