Suspicion rules ahead of latest Hungary-EU talks

BRUSSELS (Reuters) - Hungary appears no closer to convincing European officials to restart talks over financial aid and Prime Minister Viktor Orban sounded a pessimistic note ahead of a crucial meeting in Brussels on Tuesday, but that may suit the maverick leader.

The European Commission, already at odds with Orban over his aggressive, centralising style, halted talks on an International Monetary Fund loan last December, citing legislation it said undermined the independence of Hungary's central bank.

That is just one of the issues still outstanding in a row over policy that forced Orban to deny charges he was dragging Hungary towards authoritarianism when he met Commission President Jose Manuel Barroso in January.

Orban and his ministers have been saying for months they are doing all they can to get aid talks going, but the gestures they have made on legislation have not met European Union demands and analysts believe the prime minister may simply be playing for time.

In a speech to business groups and diplomats in Brussels on Monday, Orban blamed the EU and the IMF for the stalemate.

"I believe if that if the IMF was ready to provide, not a loan, but a precautionary arrangement, that would be enough to stabilise the Hungarian economy," Orban said.

"We are not able to achieve a restart of the negotiations. We would like to negotiate tomorrow morning, or this afternoon, but the answer is that there are some preconditions set up by the European Union probably, which are the conditions - not for the agreement - but for starting the agreement," he said.

Orban will meet Barroso at 1130 (0930 GMT) on Tuesday.

Budapest could rely on its financial reserves to service its debt until some of the pressure on global markets from the euro zone's debt crisis eases, making investors more willing to invest in riskier assets like Hungarian bonds.

But with much of Hungary's public and private debt in foreign currencies, the risk is that those investors who are still funding it will lose faith and drive a sell-off of the forint, which could topple the country into a funding crisis.

Brussels, for its part, is offering no sign it is willing to give much ground.

"Hungary will likely need to take further steps before this can be resolved," said an EU official with direct knowledge of the negotiations, referring to the central bank law.

A meeting of Hungary's government, the Commission, the IMF, the European Central Bank and the Hungarian central bank last week made little progress and an EU diplomat said it was difficult to predict the outcome of Barroso's talks with Orban.

"There's no trust at the political level, with both sides accusing each other of being unreasonable," the diplomat said.

DEFIANT

With the IMF programme contingent on the EU's backing, the government submitted changes to the central bank law to parliament last week but did not address all the concerns of the Commission and the ECB.

At the heart of the dispute are moves to reduce the salary of the bank's governor and senior officials, breaking EU law that prohibits pay cuts during a governor's tenure.

"We introduced a salary cap, a general public office salary cap," Orban said, referring to Budapest's reforms. "They say this is illegal. We don't think so."

Analysts say it seems like a phoney war, which hides Orban's intent either to avoid submitting to the conditions that would come with another IMF programme or simply to win one without conceding much more ground.

Orban, who helped lead Hungary's fight against Communism and was premier between 1998 and 2002, won a landslide victory in 2010 with his Fidesz party. The party used its strong mandate to rewrite more than 300 laws and the country's constitution, in changes critics say weaken democratic checks and balances.

Credit rating agencies have cut Hungary's sovereign bonds to "junk" status in response to some of those moves and the forint has only been propped up by hopes of an IMF deal, with investment banks including Credit Suisse still expecting Hungary to agree a precautionary loan this year.

That faith has been undermined by the lengthy row with Brussels, however, and Orban's leeway for bargaining would narrow if investors turned against Budapest as a result.

"It depends on how patient markets are," said Gergely Hudecz, an economist at Credit Suisse in Paris. "As long as markets give the benefit of the doubt that an IMF deal will happen, the government will take its time to negotiate."

(Additional reporting by Paul Carrel in Frankfurt and Krisztina Than in Budapest, editing by Patrick Graham/Ruth Pitchford)