Hungary govt not giving in to IMF/EU, eyes Oct vote

* Hungary govt will not back down on bank tax-analysts

* Ruling Fidesz wants to win Oct. 3 municipal vote as well

* PM Orban seen adamant on bank tax, cbank pay cut

By Krisztina Than and Gergely Szakacs

BUDAPEST, July 21 (Reuters) - Hungary's government will press ahead with plans to tax banks both this year and next, defying International Monetary Fund and EU calls for structural spending cuts, as it woos voters before local elections.

The government has shown surprisingly little sensitivity to markets since winning a landslide victory in a parliamentary vote in April and analysts say it is unlikely to back down on issues of disagreement with the international lenders to avoid losing face -- and votes.

The forint fell sharply after the lenders suspended a review of a 20 billion euro funding agreement signed in October 2008 to avert financial meltdown after failing to get sufficient clarity of the government's future economic policies. [ID:nLDE66I054]

Prime Minister Viktor Orban rebuffed the lenders, saying it was Hungary's "exclusive national responsibility" to decide how it achieved the 2010 3.8 percent of GDP budget deficit target.

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For a Q+A on Fidesz's political motives [ID:nLDE66I1V2]

For a menu of stories on Hungary, markets[ID:nLDE66I054]

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Fidesz won a more than two-thirds majority in parliament, giving Orban the power to change any law.

It has stuck resolutely to its populist election promises of cutting taxes and creating jobs to spur growth, rather than imposing the deep cuts demanded by lenders and adopted by the ousted Socialists who were punished at the ballot box.

Lajos Kosa, vice chairman of the ruling Fidesz party, fired another warning shot on Wednesday, saying the IMF should be realistic when considering a 2011 deficit goal of 2.8 percent.

"It is obvious that Hungary's situation is one of the most difficult of all member states in European Union. In such a situation, expecting us to run the lowest deficit ... they can say that, but this will not work," he told public m1 television.

"The IMF must be mindful to remain grounded in realities."

Analysts do not see any government change of heart soon.

"Orban sticks to an issue if he believes he can win ... and I think with the bank tax, he will not back down," said Csaba Toth, political analyst at think tank Republikon.

Toth also said he believed an agreement with lenders on the funding deal that expires in October, would eventually be signed, but only once their patience had been sorely tested.

"The fact that the latest IMF review came and went without agreement is a serious concern. The government has shown little willingness to bow to pressure, re-affirming that it has no intention of imposing further austerity on the economy," said Timothy Ash at Royal Bank of Scotland.

MARKETS CALMER

Fidesz wants to pass the bank tax in parliament on Thursday to raise 200 billion forints ($900 million) in taxes from the financial sector both this year and next, even though lenders said deficit cuts should be based on durable structural measures, especially in 2011, to make the budget sustainable in the long run.

It wants to maximise support for the local election on Oct. 3 and introducing austerity measures of the sort of it campaigned so vehemently against would risk alienating voters.

Once that election is over, analysts say Fidesz should have a freer hand, with the next national vote not due until 2014.

The government will also go ahead with a plan to cap public sector salaries and cut central bank Governor Andras Simor's pay -- another issue the EU warned Hungary about.

"There is the bank tax and the comments attacking the independence of the central bank: Orban does not like Simor so he confronted him directly. He cannot backtrack on this," said Richard Szentpetery Nagy at think tank Meltanyossag.

"Fidesz has a big lead in the campaign (to Oct. 3 election) and if it can keep power on the local level or win over Budapest, then there won't be another election for three and a half years," added Zoltan Kiszelly, another analyst.

Markets calmed down on Tuesday and Wednesday but the halt in talks will maintain uncertainty in Hungarian markets in the coming months and analysts said the country was running the risk of renewed currency weakness until a deal is reached.

The suspension of talks drove down the forint EURHUF=D2 on Monday to levels of 292 versus the euro last seen in May 2009 while government bond yields surged.

Orban will meet German Chancellor Angela Merkel later on Wednesday, with a press conference due at 1315 GMT. (Reporting by Krisztina Than and Gergely Szakacs; Editing Alison Williams)