Hungary risks a suspension of its IMF/EU aid and a market selloff if current talks fail to resolve differences with lenders about its economic programme and budget plans, analysts said on Friday.
The sticking points are the 2011 budget deficit goal, a tax on banks to plug this year's budget hole, and a planned state-run fund to help troubled borrowers, local media reported.
If the centre-right government fails to reach a deal with the International Monetary Fund and the European Union, Hungary's financing costs could surge, even though it does not need IMF money at the moment, analysts said.
Hungary -- which resorted to an IMF/EU bailout in 2008 -- has been financing itself through the markets. But it still needs the lenders' safety net to retain investors' trust, given its high public debt at 80 percent of gross domestic product (GDP) and strong reliance on foreign financing.
Failing to reach a deal "would be like lighting a gunpowder barrel which we are sitting on," said Zoltan Torok, analyst at Raiffeisen.
"My baseline scenario is that there will be an agreement in this negotiation round ... and they (IMF) will release the next tranche of the loan as there's such a strong pressure to agree."
Hungary's markets slumped in June after comments by some officials comparing the country's financial situation to that of troubled Greece.
The government has calmed investors with planned measures to contain this year's deficit, but the European Union in particular is expected to insist Hungary brings next year's deficit below the bloc's official 3 percent of gross domestic product (GDP) ceiling.
The government wants more fiscal room to boost the economy.
Economy Minister Gyorgy Matolcsy told Reuters earlier this month that for next year the government hopes lenders would agree to a 3.0-3.8 percent deficit, in exchange for structural reforms.
According to media reports, other potential stumbling blocks are the bank tax, which the IMF believes is excessive; and the state fund to help borrowers by state buying bad loans -- the Fund says social problems should be addressed differently.
Hungary wants to extend its standby agreement (SBA) until the end of 2010 and seek a precautionary deal for 2011 and 2012.
"The IMF is not fundamentally against an SBA extension ... the issue is if Hungary can accept a lack of movement on the deficit targets," said Peter Attard Montalto at Nomura.
Romania had to take tough steps last month to secure the release of its IMF aid and reassure investors.
Hungary's budget deficit hit 119 percent of the full-year target by the end of June, mainly due to lagging tax revenues, and the government needs to collect 200 billion forints ($917 million) in taxes from the financial sector this year even to meet the 3.8 percent deficit target.
According to legislation being considered by parliament, the tax would remain in place in 2011.
Talks are expected to be completed by early next week, but some analysts said a delay was possible, allowing talks on the cuts required to reach a 3 percent deficit target to be resumed only after municipal elections on Oct. 3.
"There could be delaying tactics, where the important decisions are postponed until later, perhaps after the local elections," said Christian Keller at Barclays.
"There is a possibility that the IMF would say 'we have made some good progress but there are outstanding issues which require further work and we will come back later.'"
The IMF's Hungarian representative was not available for comment.
Zsolt Kondrat, economist at MKB in Budapest, said an agreement was likely.
"Of course they can test the markets again how it would go down if there was no agreement ... but then depending on the global market situation there could be a serious depreciation (of the forint) and a rise in yields," he said.
(Reporting by Krisztina Than; Editing by Ruth Pitchford)