* 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 (Reuters) - 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 reforms.
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 political climbdown.
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 initially wanted.
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 compromise.
“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 Political Capital.
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 economy.
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 policy changes.
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.”