Hungary's prime minister signalled on Thursday he would not renew a safety net with the IMF and would row back on a commitment to cut the budget deficit to European Union-prescribed levels next year.
In the latest of a series of comments that have confounded markets, Viktor Orban said Hungary would meet this year's budget target under the International Monetary Fund-backed deal but the IMF safety net would end in October and the matter of negotiating a new one was insignificant.
He told a news conference that Budapest would now seek to renegotiate an agreement to cut its shortfall below 3 percent of annual economic output, originally planned for next year.
Analysts said Orban's statements could indicate a delay in reaching the 3 percent budget gap level, as some European Union members are not expected to achieve that until at least 2014.
The EU and IMF suspended talks over the 20 billion euro bailout package on Saturday after Orban's centre-right Fidesz cabinet refused to abandon a big tax on bank profits that the Fund says will squeeze lending and hit growth.
Under Hungary's convergence plan submitted to the EU, it agreed to cut its budget deficit to 3 percent by 2011 from a target of 3.8 percent this year.
The important question is an agreement with the EU, everything else is secondary or insignificant, Orban said.
Analysts believe it is unlikely that the EU will negotiate any new aid for Hungary without the IMF.
Orban said: We will have a single demand, namely that of equal treatment, that is, the same time frame must be set for all to meet the EU's expectation.
If we agree with the EU and it becomes clear that it will be easier for us than other states to achieve the 3 percent deficit, that will strengthen Hungary's credibility in markets to an extent that will make debt financing easier.
Orban, who took power in May with the largest majority in Hungary's post-communist history, has stunned markets with a strong domestic focus, shunning outside advice and confounding a Europe-wide push towards spending cuts.
Emboldened by its election victory and austerity fatigue among voters, Fidesz has shunned outside help and ignored market warnings before Oct. 3 municipal elections where it hopes to cement its already strong hold on Hungarian politics.
His approach has spooked investors already rattled by problems in the euro zone periphery and the threat of a double-dip global recovery.
Hungary's forint currency EURHUF=D2 plunged more than 3 percent on Monday to around 292 versus the euro -- levels last seen in May 2009 -- but climbed back and was trading at 283.60 by 1232 GMT on Thursday.
The Finance Ministry sold all the bills it had put on offer at a 12-month Treasury bill auction, but yields rose, indicating that markets remained skittish.
Orban has embraced a pro-growth strategy, deriding the two years of tough budget cuts under his Socialist predecessors as economically destructive.
But mixed messages and some government proposals, such as a quest to glean 200 billion forints ($892.4 million) by 2011 from a tax on banks, led to disagreement with the IMF and EU in talks that ended prematurely.
Hungary's budget deficit is below the EU's average and it has been financing itself from the market since last year. But it has a high public debt at 80 percent of GDP and a large stock of foreign currency debt held by households, making Hungary vulnerable when it comes to shifts in market sentiment.
The fact remains that Hungary has an outsized stock of external debt and is reliant on capital flows from foreigners. These flows can be reversed very quickly, said Peter Attard Montalto at Nomura in London.
(Additional reporting by Gergely Szakacs; writing by Michael Winfrey; Editing by Mark Heinrich)