* Swiss franc stability still not helping FX borrowers
* Banks: longer zloty, forint rally needed to ease pressure
* Unemployment, growth contraction also hurt outlook
By Michael Winfrey
Economics Correspondent, Central Europe, Balkans
PRAGUE, April 28 (Reuters) - Eastern Europeans holding Swiss franc mortgages have seen little relief from its retreat against the euro and are still struggling with a spike in debt costs that could push up bad loans and further undermine local banks.
The Swiss National Bank's (SNB) moves to weaken the franc in March offered the hope of some breathing space to the thousands of Poles, Hungarians and others who took mortgages in francs only to see costs soar as their own currencies collapsed.
A weaker franc was also a promising sign for the banks behind the loans, themselves struggling with the funding concerns that have driven a wider sell-off of eastern European assets since the financial crisis deepened last year.
But after early gains, Hungary's forint and the Polish zloty are still 28 and 35 percent weaker from all-time highs reached last summer and analysts say both need to gain a lot more before the pressure on economies and borrowers eases.
That in turn looks vital to reassure the banks' western parents, already gun-shy about lending in economies struggling with weak currencies, a collapse in industry and euro zone demand, and a credit crunch.
"It's a problem. It means debt servicing costs remain high, particularly at a time when the real economy is feeling the pain from the collapse of trade, and from the limited availability of new loans," said Barclays Capital strategist Koon Chow.
"So we're really getting into the pain period now."
CURRENCIES
The credit crunch has already forced Hungary, Latvia and Romania to turn to International Monetary Fund for funds to avoid potential balance of payments and banking sector crises.
They, along with Poland, Estonia, Lithuania and Bulgaria, became heavily exposed to loans in francs and euros -- and even yen in some cases -- after borrowers looked across their borders for cheaper funding in the boom years earlier this decade.
According to Hungary's central bank, 70 percent of household loans given by banks there are in foreign exchange -- a figure unrivalled by any new EU state with a floating exchange rate.
Hungary's foreign exchange loans totalled 11.8 trillion forints, or about 45 percent of the economy overall. In Poland, 40 percent of mortgages are in foreign exchange, and FX loans make up 18 percent of its gross domestic product.
When the SNB cut rates on March 6 and said it could intervene, the forint was 36 percent weaker against the franc versus a record high in July 2008. It has since clawed back somewhat but is still down 28 percent from that level.
The zloty was down 41 percent against the franc at its worst point in February of this year. It too has rallied but is still 35 percent weaker from its July 31, 2008 high.
"For retail clients to really feel the positive impact of the exchange rate, a long-term and sustained firming of the forint exchange rate would be needed," Hungarian bank CIB said.
Raiffeisen Hungary said: "In our view, the current Swiss franc exchange rate is still not favourable to our clients".
According to a Reuters poll taken at the end of March, dealers expect only gradual recovery in central and Eastern European currencies versus the euro -- a track likely to also be reflected in their performance against the franc.
RECESSION, UNEMPLOYMENT
Worries over their eastern arms have added to pressure on
western European banks, led by Unicredit
They own most of emerging Europe's banking sector and have largely been behind the credit-fuelled boom in many countries, although they have pulled back from foreign currency lending.
At the heart of the concern is a worsening economic picture. This week, the IMF said the region would contract this year in forecasts worse than many governments' worst case scenarios.
Hungarian bank CIB and Raiffeisen said they had encountered more borrowers experiencing difficulty with payments.
"On top of the unfavourable exchange rate, job losses caused by the economic crisis, part-time employment instead of full-time employment, and salary reductions certainly have a negative impact on the repayment ability of clients," CIB said.
Poland's unemployment rate jumped to 11.2 percent in March, up from 10.9 percent the previous month -- a reversal in a trend that had seen the rate fall from around 20 percent earlier this decade. Hungary's rate has climbed to 9.7 percent.
Research house Capital Economics sees non performing loans in Poland rising to around 10 percent. It sees them at 12 percent in Hungary.
Emil Szwed, an analyst at mortgage broker Open Finance said the weaker Swiss franc had reduced some pressure on zloty loan holders, but the situation was still grim.
"Now the real issue is potential job losses. When you lose your job, it doesn't matter if your mortgage was in francs or zlotys. In either case, you won't be able to pay it," he said. (Additional reporting by Sandor Peto in Budapest and Chris Borowski in Warsaw)