WASHINGTONT/BUDAPEST (Reuters) - The head of the International Monetary Fund on Thursday called for "tangible steps" by Hungary to show it is willing to follow policies that will help stabilize its economy before the global lender can agree to begin key talks on a new financing program.
"Before the Fund can determine when and whether to start negotiations for a standby arrangement, it will need to see tangible steps that show the authorities' strong commitment to engage on all the policy issues that are relevant to macroeconomic stability," IMF Managing Director Christine Lagarde said in a statement after meeting Hungarian officials.
Hungary is under pressure to reverse a slew of unorthodox policies, with the European Commission warning on Wednesday Budapest may face legal action if it does not change controversial laws including one it says may threaten the central bank's independence.
The minister in charge of negotiations with international institutions, Tamas Fellegi, said after talks with Lagarde and other senior IMF officials in Washington that it was in the interest of markets and the Hungarian economy that loan talks start soon.
He said he had discussed with the IMF the economic situation in Hungary and some issues related to the controversial economic policies, including the independence of the central bank.
"We fully understand and agreed with the experts from the IMF that Hungary needs to follow policies that strengthen the confidence of the markets, the Hungarian economy and the Hungarian institutions to lay the basis for sustained economic growth," Fellegi said.
"We recognized that the two main focal points should be confidence and trust of the markets, and also economic growth," he added.
He said he would meet with European partners next week to iron out disagreements so that a timetable for negotiations can be agreed and talks can begin.
Lagarde stressed that support by European authorities and institutions for Hungary were necessary before talks could begin on a new program.
She described the talks with Fellegi as "useful". Hungary's forint currency hit a two-week high on Thursday on market hopes that a deal with the IMF and EU will be reached.
Hungarian Prime Minister Viktor Orban said on Thursday his government was open to altering its policies to win a new financing deal, but he demanded that the EU and IMF bring "not political opinion but arguments" to the aid talks.
After a string of ratings downgrades pushed Hungary's debt costs to prohibitive levels and hammered its currency, Orban has abandoned a previously anti-IMF stance and is now scrambling to avoid being shut out of international markets.
Orban, facing sliding popularity at home and a distinct lack of sympathy in international markets, said his government would be flexible but needed more specifics from Brussels.
"Our general approach is that we are open and flexible, we are ready to negotiate all the points, but what we need is not political opinion but arguments," he told a group of foreign journalists.
"We would like to get more specifics on the points (where) they would like to see modifications or corrections. And we are ready to consider them."
For Orban, criticised for pushing through new laws on public finances that cement a flat income tax and new legislation on the central bank while treating the country's would-be lenders with defiance, going back to the IMF cap in hand represents a major political climbdown.
He must now walk a fine line between sealing a deal with Europe's bailout lenders while trying to avoid losing further significant public support.
An opinion poll by pollster Ipsos published on Thursday showed public support for Orban's Fidesz party plunged to new lows in January, while 84 percent of those asked said the country was on the wrong track.
But markets were buoyant. The forint rose 1 percent to 308 versus the euro. The government also placed more bonds than planned in an auction, but yields stayed above 9 percent, a level at which Budapest cannot afford to borrow indefinitely.
Fitch, which became the last of the three major agencies to cut Hungary's credit score to "junk" status this month, said an IMF funding deal would be positive for Hungary but would not automatically trigger an improvement in ratings.
"The best way for Orban would be to accept the conditions, which would obviously have near-term political consequences but would give him time to rebuild until the next election in 2014," said analyst Peter Kreko at Political Capital.
Orban's ruling Fidesz party enacted a new constitution that drew an opposition protest attracting tens of thousands last week, but with a two-thirds majority in parliament, it still remains clear of a fragmented opposition.
His measures, including crisis taxes on businesses and a $13 billion pension grab, 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.
Orban, however, said the Commission's criticism was mostly backward-looking, and the government would be able to squeeze the budget deficit to below 3 percent of gross domestic product this year for the first since Hungary joined the EU in 2004.
Brussels has given Orban a week to bring the new central bank law, which installs a government-appointed deputy governor, and judicial reform into line with EU norms or face possible infringement procedures. The Commission said it would rule on disputed laws on January 17, when it finishes its legal analysis.
Any suspension of EU cohesion funds, which the Commission flagged as a possible sanction for failing to meet fiscal goals, would be a heavy blow for an already stagnant economy.
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.
Reporting by Gergely Szakacs; Writing by Michael Winfrey and Gergely Szakacs; Editing by John Stonestreet and Carol Bishopric