UPDATE 2-Hungary PM rejects IMF/EU terms, hopes fade for deal

Thu Sep 6, 2012 10:05pm IST

* PM Orban says IMF conditions "will not work"

* Orban says to work out "alternative" set of proposals

* Forint falls 1.5 pct, yields jump on comments

* Road ahead bumpy, deal only under market pressure -analysts (Adds market reaction, background, analyst, edits)

By Gergely Szakacs and Krisztina Than

BUDAPEST, Sept 6 (Reuters) - Hungary threw hopes for a new loan to prop up its sagging economy into disarray on Thursday as Hungarian Prime Minister Viktor Orban rejected what he called unacceptable IMF conditions, crushing prospects for a fast agreement.

Orban, in a video posted on his Facebook page, cited demands from the International Monetary Fund (IMF) for a raft of changes that he said were too high a price for Hungary to pay.

"From cutting pensions to reducing bureaucracy to scrapping the bank tax and the funds to be made available to banks, everything is in there that's not in Hungary's interest," Orban said.

"The parliamentary group meeting (of the ruling Fidesz party) took the view, and I personally agree with it, that at this price, this will not work," he added.

The vulnerable Hungarian forint weakened by 1.5 percent against the euro on Orban's comments but later regained some ground, buoyed by statements from the European Central Bank that it would start a new bond-buying programme.

Orban, who in 2010 abruptly ended another IMF programme, will only agree to a deal under severe market pressure and is unlikely to back down on unconventional policies and agree to painful spending cuts before elections in 2014, analysts said.

"We suspect that market turbulence may ultimately force Mr. Orban to cede ground," Capital Economics said in a note.

"But in the meantime, today's news is likely to expose the extent to which the recent rally in Hungarian assets has been built on flimsy foundations."

For a column on the IMF talks please click

Orban's announcement came a day after he said he sought a fast closure of talks in the autumn, but following a meeting with his Fidesz party he said the lenders' conditions were unacceptable and his government would work out alternatives.

"The list is long and can be read in the press," Orban said in the video, referring to details of what he said the IMF was demanding that were published earlier by the conservative daily Magyar Nemzet.

The list has not been confirmed by the IMF, which has been unavailable for comment.

Local website Index.hu said, citing a document without revealing its sources, said the IMF list did not contain calls for pension cuts and had less specific recommendations, but urged the abolition of a new transaction tax on the central bank.

A source who asked to remain unnamed confirmed the Index report.

COLLISION COURSE

Proposals to change a flagship income tax system and cut social subsidies would collide head-on with the economic policies advanced by Orban, who has stabilised the budget with unconventional measures such as Europe's highest bank tax.

Orban's Fidesz is still the most popular party but has lost about half of its supporters since taking power and a recent survey by pollster Tarki showed just one in a hundred people asked thought the recession-hit economy was in a good shape.

To reverse that momentum, Orban is pushing a 300 billion forint ($1.33 billion) job saving plan, partly funded by a new tax on central bank operations, a key sticking point in the IMF talks, which the European Central Bank has also criticised.

"The majority in government ... do not want a deal, will want to play the Turkey card where possible, and will only accept a deal under market pressure. No pressure, no deal, it's up to the market," said Peter Attard Montalto at Nomura in London.

Turkey held stop-start talks with the Fund all through 2009, keeping its investors hoping for a deal.

"Junk"-rated Hungary faces a repayment hump in the next five quarters, with the equivalent of 4.6 billion euros falling due from its previous IMF/EU bailout alone.

Analysts have estimated that at current forint levels and by using its liquid reserves, the government could finance itself from domestic issuance at least until the end of March 2013 without an IMF loan or tapping global markets. (Reporting by Gergely Szakacs; Editing by Michael Roddy)

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