Hungary expects to sign a precautionary funding deal with the International Monetary Fund and the European Union in the second quarter, which should lower the country's borrowing costs, a top official told Reuters
on Thursday.

Hungary is now waiting for a European Commission response in
a legal row over new legislation affecting the central bank and
the judiciary, which Brussels says could undermine the
institutions' independence.

The dispute derailed informal talks on aid, and now most
analysts expect a deal on a multibillion-euro safety net for
Budapest only around the middle of the year.

Hungary's government, which broke ties with the IMF in 2010
in order to pursue unorthodox economic policies, sought the help
of the IMF and the EU in November as it needs the funding deal
to curb borrowing costs and retain market access.

Formal negotiations with lenders have not yet started.

Economy Ministry State Secretary Zoltan Csefalvay said in an
interview that some analysts' expectation that an agreement
would be reached only by the end of June were "too pessimistic."
He added that Budapest still aimed for a fast deal, implying
that agreement could be reached in the second quarter.

"I have always said we would agree in the first quarter. Now
it is March 1 so it would be rather difficult to say it will
happen in the first quarter," he said.

"Even though I think it is in the interest of all sides to
reach an agreement as soon as possible, technically this will
stretch beyond the first quarter."

Hopes for an aid deal have boosted the forint in past weeks
to around 287 now, from record lows of 324 hit in early January,
and risk premia on Hungarian assets have also declined.

Csefalvay welcomed recent gains in the forint <EURHUF=> to
below 300 per euro, which he said benefited the budget and
reflected greater confidence in Hungary.

"These levels are below 300, which as I mentioned is a very
favourable step from the aspect of the budget and even more for
debt reduction; and of course it signals how confidence in
Hungary's economy and economic policy changes," he said.

He said the government maintained its economic growth
forecast of 0.5 percent for this year, and would look at its
projection in light of first-quarter data.

"To judge whether we need a new path, we will need to see
this year's growth outlook, the first-quarter data."

The European Commission last month said Hungary's economy
could shrink by 0.1 percent this year.

TIMING OF EUROBOND SALE

When asked whether Hungary, which needs to roll over nearly
5 billion euros of external debt this year, would wait with a
foreign bond issuance until the talks with lenders are wrapped
up, Csefalvay said:

"As for timing it is logical ... it is more logical (to
issue) after an agreement (with the IMF/EU), but on the other
hand it must also be seen that in this market there is huge
demand and when, what kinds of waves there are, it is reasonable
to take that into account."

He did not rule out the possibility of tapping markets
earlier.

"The government will assess what needs to be assessed and
will decide accordingly," he said, when asked repeatedly.

In March and April 2011, after announcing fiscal reforms
which boosted market sentiment, Hungary successfully placed
dollar-denominated bonds worth a total of $4.25 billion.

It has not issued foreign currency bonds this year yet, but
forint-denominated bond sales have attracted good demand in
recent weeks due to improved investor sentiment.

However, yields on Hungary's forint-denominated benchmark
bonds are still above 8 percent<HUBONDFIX>, which is not
sustainable in the long term.

"What's happening is a slow rebuilding of market confidence,
which takes quite a while as I see it. This will not happen
overnight. I think part of rebuilding confidence is a deal with
the EU and the IMF, which can manifest stronger confidence,"
Csefalvay said. "The Hungarian economy needs this."

(Reuters)