BUDAPEST Hungary will begin talks with the International Monetary Fund on a vital financing backstop on Tuesday, in what promise to be difficult negotiations due to the government's determination to retain its unorthodox economic policies.
Loaded with central Europe's highest debt and its export-driven economy headed into recession, junk-rated Hungary needs outside help to cut borrowing costs and avert a market blowout as a prolonged debt crisis engulfs the neighboring euro zone.
For conservative Prime Minister Viktor Orban, entering talks on a multi billion-euro loan with the IMF and the European Union is a major political climb-down, and the wily negotiator is not likely to give in easily to lenders' demands.
A joint IMF/EU mission will visit Budapest between July 17 and 25 for the first round of talks on a deal which Hungary has said could be reached by the end of October at the latest after a series of earlier self-imposed deadlines.
With one eye on an election due in 2014, Orban has already pushed the key parameters of the draft 2013 budget through parliament, earmarking social tax cuts for employers and small firms to save jobs and bolster public support.
Part of that will be paid for by a controversial new tax on financial transactions, the latest in a string of unconventional policies that have cemented a rise in Hungarian risk, preventing the central bank from lowering the EU's highest interest rates.
"We believe that the EU and the IMF will require the modification of the financial transaction duty, along with the amendment of the 2013 budget framework," Credit Suisse said in a research note on Monday.
"However, the government may not be ready to compromise on these issues, which leads us to attach a significant (around 20-30 percent) probability to the interruption of negotiations."
In a hint of the haggling to come, parliament Speaker Laszlo Kover, a strong ally of Orban, said over the weekend that the negotiations would be about who is in charge of the economy and that Hungary would not give in to "senseless diktats".
"I do not think ... that the government would allow itself to be blackmailed," Kover told public television.
"There is no reason to turn the economic policy that we have pursued over the past two years upside down."
Orban wants to preserve his flagship flat tax policy to help families and would be reluctant to impose a wealth or property tax that could hit large swathes of the population ahead of the 2014 election, a key test of his handling of the economy.
Hungary, which has not tapped international markets this year, hopes that IMF/EU "insurance" will help reduce its borrowing costs from over 7 percent -- reined in from double digits early this year by the prospect of a deal.
But if the euro crisis worsens, the government may end up tapping the loan next year to cover its refinancing needs, a prospect flagged in a Sunday interview by minister Varga.
Some analysts doubt Hungary, which is not under any immediate funding pressure, will be able to roll over its external debt in 2013 without an IMF/EU loan, complicating the government's efforts to get a deal on its own terms.
"Even if the EU/IMF mission goes smoothly in the coming weeks, the autumn parliamentary session will be the real test of the government's readiness to comply with an IMF program's potential conditionality, in our view," Credit Suisse said. (Editing by Catherine Evans)