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Hungary said on Monday that it has reached a compromise with the IMF and the ECB over a disputed central bank law, which could unblock credit talks and shield the vulnerable forint currency from a deepening euro debt crisis.
However, no comment was immediately available from the IMF or central bank and after months of delays, any broader agreement over a financing backstop with the IMF and EU may still be a distant prospect. Analysts say Prime Minister Viktor Orban, facing a probable recession and falling public support, will not backtrack on unorthodox economic policies that international lenders will challenge.
Mihaly Varga, the minister in charge of IMF talks, told public radio that once parliament approves the new law amendments, talks with the International Monetary Fund and EU can start about a financing backstop which indebted Hungary needs to cut borrowing costs.
"Over the weekend ... we have managed to close our discussions relating to the central bank law and we managed to prepare the amendment which we can submit to parliament this week," Varga told Kossuth radio on Monday.
"With this, the last remaining serious hurdle in the way of (credit) talks will be eliminated."
The conservative government's policies over the past two years have included big windfall taxes on banks. It has managed to keep investors on side with the prospect of an IMF deal since January after the forint plunged to record lows and Hungary's debt rating was cut to "junk".
The euro debt crisis, the Greek elections and a weakening forint in the past weeks have increased pressure on Hungary to sit down with its lenders and start talks.
The offer of new changes come after the ECB and the IMF said the government's proposed law could undermine the Hungarian central bank's independence.
Varga said the government would withdraw amendments submitted earlier and will put in a new amendment this week which will take into consideration the issues raised by the central bank, the European Central Bank and the IMF.
He said that parallel to this, the prime minister will send a letter to European Commission President Jose Manuel Barroso in which he will undertake not to nominate a new deputy governor or further Monetary Council members until the end of the term of the bank's current leadership in March 2013.
"We have managed to find a solution which is reassuring to everybody," Varga said.
Varga said discussions continued over the weekend when he also spoke with Governor Andras Simor several times. He said the central bank was willing to support offering the compromise in a letter to the IMF, ECB and the European Commission.
TOUGH TALKS AHEAD
Hungary is not under immediate funding pressure because it has cash buffers which analysts say could be sufficient until early 2013, even without tapping international markets.
But its government bonds are selling at yields of close to 9 percent, rates it cannot afford in the long run.
Orban told Austrian newspaper Die Presse over the weekend that Hungary can fund itself without help from the IMF although a deal would reduce Budapest's borrowing costs and provide a backstop in nervous markets.
But public support for Orban's Fidesz party fell to 22 percent in a Median survey last month, the lowest in a decade, which will make him reluctant to tweak policies such as a flagship flat income tax or a new tax on financial transactions which is meant to plug budget holes next year.
"In our view, the government is likely to move forward very slowly with negotiations unless external market conditions force a swift compromise," Eszter Gargyan at Citigroup said.
Most analysts expect an agreement in the fourth quarter.
"News related to the 2013 budget draft does not suggest any improvement in fiscal governance that could pave the way for a smooth agreement ... In our view, the IMF will ask for more expenditure cuts to increase budget reserves and more ambitious expenditure cuts to create room for tax cuts on low wages in order to support job creation," Gargyan added.
Last week Hungary more than doubled its revenue goal from the new transactions tax for 2013 to cover higher public spending while keeping the budget deficit at levels of below 3 percent agreed with the EU.