FACTBOX-Key political risks to watch in Hungary

BUDAPEST, Sept 1 (Reuters) - Hungary's new Fidesz government has confounded investors since taking office in May, with its latest comments last week sending mixed messages about the state of its relations with the IMF.

Negotiations with the International Monetary Fund (IMF) and EU were halted in July without the conclusion of a review of the country's existing funding deal which runs out in October.

This was only weeks after in early June government officials sent confusing messages about the state of public finances, likening Hungary's problems to those of debt-laden Greece.

Last week the government made conflicting comments again, on Tuesday hinting that IMF talks would be renewed in the autumn and the next day firmly ruling out a new financing deal. [ID:nLDE67O0YS]

Significant risks remain on the fiscal front and in debt financing in 2011 and 2012. Two ratings agencies signalled they might cut Hungary's sovereign debt rating. [ID:nLDE66M0U9]

Hungary will hold local municipal elections on October 3 which the ruling Fidesz party looks set to win with a big margin based on recent opinion polls.

Followings are key risks to watch in coming months.

IMF/EU

Prime Minister Viktor Orban has said the government would meet its obligation under its current financing deal with the IMF -- containing the budget deficit at 3.8 percent of GDP this year -- but will let the deal run out in October and will not go for a new precautionary IMF agreement for 2011 and 2012.

Orban has also said Hungary would only negotiate with the EU about 2011 budget plans and the country was strong enough to finance itself from the markets. Some analysts believe the government will sign a new IMF deal after October municipal elections, but others say this is unlikely, a Reuters poll showed last week. [ID:nLDE67N1M7] [ID:nLDE67N1M3]

Hungary is unlikely to face financing problems this year, but next year its debt expiries will rise and it will also have to start repaying its loan to the EU, which could put upward pressure on yields. Having no supranational cushion from lenders leaves Hungary exposed to any global market shocks.

What to watch:

-- comments from the government and EU on Hungary's 2011 budget plans. Any comments on whether talks with lenders could resume after October local elections. Signs of change in the government's populist rhetoric after the vote.

-- PM's speech on first 100 days of government on Sept 7.

-- demand at the bi-weekly government bond auctions and the debt agency's 2011 financing plan due to be released in Dec.

BUDGET DEFICIT

To reassure investors, the government in June announced measures to achieve this year's deficit target, including spending cuts and a new tax on the financial sector which will stay in effect in 2011.

At the end of July the deficit was at 115 percent of the full-year target, and the central bank said it could overshoot the target unless the government takes further steps. The IMF and EU urged durable budget measures and wanted to reduce the size of the bank tax next year. But the government rejected this and parliament passed the bank tax law.

It may also levy a new tax on the energy and telecom sectors next year.

Under the EU's Excessive Deficit Procedure, Hungary needs to cut its deficit below 3 percent of GDP next year and it seems unlikely that the EU would agree to a loosening of this target. [ID:nSGE67S006]

Orban -- whose government has a growth-focused policy -- wants to soften next year's budget goal and has asked for the EU to be more uniform in the way they set deadlines for countries to bring their deficits into line.

Nine EU states including Hungary have also asked the EU to consider changing its accounting rules in a way that could cut the deficit and debt levels of states that implement pension reforms. [ID:nLDE67G1FP]

What to watch:

-- government's budget plans for 2011. The deadline for submission to parliament is Oct. 31 and the Economy Ministry must submit the draft budget to the government by Oct. 15.

-- Orban's second action plan promised for later in 2010

-- EU's response to Hungary's "equal treatment" idea, and to the nine countries' proposal to change accounting rules.

CENTRAL BANK

Since the new government took office, it has replaced the top officials at nearly all the main public institutions with its own candidates.

Fidesz has also stepped up pressure on central bank Governor Andras Simor to resign over what it calls serious policy errors.

The ruling party also attacked Simor over some of his private investments and in the latest move, cut central bankers' salaries from Sept. 1 despite objections from the European Central Bank. Simor has said he will serve out his mandate, which expires in 2013.

Fidesz could increase pressure further on Simor to resign or may even try to effectively remove him, analysts have said.

What to watch:

-- further possible attacks on Governor Simor and the bank

-- possible attempts to meddle in monetary policy

For political risks to watch in other countries, please click on [ID:nEMEARISK]

(Reporting by Krisztina Than, Editing by Sonya Hepinstall)