* Minister meets IMF chief for Thursday informal talks
* Visit follows EU criticism on budget, democratic slippages
* Budapest must reform disputed laws to secure vital aid
By Gergely Szakacs
BUDAPEST, Jan 12 Hungary must convince the
International Monetary Fund on Thursday it is willing to change
its ways in return for aid to remain solvent, a day after the
European Union flagged the threat of legal action over hard-line
For Prime Minister Viktor Orban, widely criticised for
pushing through restrictive new laws on public finances and the
central bank while treating the country's would-be lenders with
defiance, going back to the IMF cap in hand represents a severe
Tamas Fellegi, minister in charge of talks with the IMF and
the EU - which led a 20 billion rescue of Hungary in 2008 -
meets IMF chief Christine Lagarde in Washington on Thursday with
a mandate to accept a stricter funding deal than Budapest
The forint currency's plunge to record lows last week and a
surge in state borrowing costs to levels viewed as unsustainable
left Orban, who has stabilised the budget with a $13 billion
pension grab and Europe's highest bank tax, no option but to
"Trying to sell an about-face to his camp still looks like a
more sensible option for Orban than entering an unpredictable
situation with the country possibly becoming unable to finance
itself by the spring," said analyst Attila Juhasz at think tank
Orban, whose ruling Fidesz party enacted a new constitution
that drew an opposition protest attracting tens of thousands
last week, has seen a plunge in support since his 2010 election
landslide but remains clear of a fragmented opposition.
His reforms, including crisis taxes on businesses, have
stabilised the budget for 2011 but failed to convince the
European Commission, which must sign off on any aid package to
Hungary, that the improvement is sustainable.
His government also introduced a law viewed as threatening
the central bank's independence, which it has since offered to
modify following the threat of legal action from the EU.
Any suspension of EU cohesion funds - which the Commission
flagged as a possible sanction from 2013 for failing to meet
fiscal goals - would strike a heavy blow to an already stagnant
The EU has also voiced concerns about broader legal
developments, telling Hungary on Wednesday that "a legally
stable environment based on the rule of law, democratic
principles and fundamental rights" was the best guarantee for
public and investor trust.
Brussels gave Orban a week to bring the new central bank law
- which installs a government-appointed deputy governor - and
judicial reform in line with EU norms or face possible legal
action, complicating government efforts to secure international
funding to shield its currency and retain market access.
The European Commission said it would rule on disputed laws
on Jan. 17, when it finishes its legal analysis.
Hungary must roll over nearly 5 billion euros worth of
external debt on top of forint expiries this year. Bond yields
are stuck at over 9 percent, reined in from double digits only
after pledges to seek a fast loan agreement.
"The Hungarian government will not want to become insolvent
while the EU eventually would have to pay out should Hungary
face national bankruptcy," Commerzbank said in a note.
"A last-minute cooperation involving compromises on both
sides is therefore the only alternative."
That will likely require further changes to the central bank
law as well as a new law on public finances, which etched
Orban's flat income tax regime into stone, limiting room for
Minister Fellegi is due to meet EU Economic and Monetary
Affairs Commissioner Olli Rehn on Jan. 20.
Analysts said the issue of aid was unlikely to come up
unless Budapest adheres to EU demands for legal changes first.
"Wednesday's EU Commission position shows that there will be
no negotiations whatsoever about any kind of (financial) support
as long as the Hungarian government fails to meet these
requirements," said Juhasz at Political Capital.
"The European Commission will use every tool available to
ensure that democratic legal principles are upheld in Hungary."