Hungary will seek a two-year precautionary deal with the IMF and EU for 2011-12 in the range of 10-20 billion euros and hopes to agree with lenders on a higher budget gap than 3 percent of GDP for next year, the Economy Minister said on Friday.

Gyorgy Matolcsy also told Reuters that the country's leading foreign-owned banks had pulled out of talks on a bank tax targetted as a key source of state revenues, but the government would push on with implementation anyway.

The minister said his centre-right government, which swept into power at April elections, was committed to this year's budget deficit target of 3.8 percent of GDP and plans to reduce the gap further next year and in 2012.

But he said the deep structural reforms which the government is planning for 2011 and 2012 will have significant additional costs, and the difficult situation of the euro zone economy could also make deep deficit cuts hard next year.

I think we should agree with our partners on a range of between 3.0 and 3.8 percent (for 2011), undertaking very deep serious structural reforms, Matolcsy said in an interview.

This is the range for 2011 and I think that if we manage to achieve this, then we can undertake a deficit of around 3 percent for 2012.

Hungary's budget deficit was projected to fall below 3 percent next year under its existing agreement with the IMF and the EU. That 20 billion euro financing deal, which was signed in Oct. 2008, will expire in October.

Matolcsy said that after a consolidation of finances this year, the period of 2011-12 will be dedicated to deep structural reforms, which should help the economy return to fast growth and sustainable financial balances from 2013 onwards.

For this period, to serve as a safety net, the government aims to sign a new precautionary deal with lenders for two years.

Our intention is that we extend the existing IMF/EU deal until end of the year and from the beginning of next year we continue with a 2-year precautionary agreement but in a way that we signal that this is a different deal, not an urgency, he said.

Hungary will conduct talks with the lenders in two rounds, starting next week, and resuming talks in the early autumn.

Matolcsy said the economy could grow by 2.5-3.0 percent next year if there is growth of around 0.5 percent this year.

Structural reforms in the tax system, local governments, education and state administration would cost money at the beginning, and this should be acknowledged in the deficit figures, he added.

We see it possible that from the 3.8 percent deficit level we go towards 3 percent (in 2011) by a few tenth of percentage points, (the size of cuts) depends on IMF/EU talks and ... the situation of the euro zone, Matolcsy said.


Hungary's government also wants to collect 200 billion forints ($855.4 million) from the financial sector in taxes this year in order to keep the deficit in check. Close to 187 billion would be raised by way of a new tax, which has triggered objections from banks who said it would hurt lending and profitability.

The tax would remain in place next year.

Matolcsy said the executive board of the banking association has withdrawn its willingness to negotiate with the government, but the cabinet would submit this bill on the bank tax to parliament on Friday.

Based on this bill, banks would pay 120 billion forints this year, insurers would put up 36 billion, and the rest of the financial sector would pay 30 billion.

Hungary is vulnerable to negative shifts in market sentiment due to its high public debt, at around 80 percent of GDP, and also a large stock of foreign currency debt held by households.

The government has said it would create an asset management company by the end of 2010 to help protect troubled borrowers who are no longer able to pay their loans due to sharp gains by the Swiss franc in which most of the mortgages are denominated.

This will be a market enterprise consisting of state guarantees and funds from the bank sector and it will also fund itself from the financial markets, Matolcsy said.

He said this company, which would essentially work as a bad bank, would help debtors and banks to convert foreign currency loans into forints, and also property rights into a lease.

The state fund could be launched with 30 billion forints of capital from banks and another 30 billion in the form of a state guarantee based on preliminary calculations, he said.

If we want to squeeze this animal into a zoo cage, then it is a bad bank, but a special kind, as it is not a bank.

(Reporting by Krisztina Than and Gergely Szakacs, editing by Mike Peacock)