Hungary, which must roll over 4.7 billion euros ($6.3 billion) in external debt next year, turned to the IMF and the EU for renewed assistance after its forint currency hit a record weak point last month, rattled by market doubts about the government's unorthodox policies.
After meeting with government, central bank, debt agency and IMF officials in Budapest on Thursday, Citi analysts said in a note that Budapest's preferred choice would be a Precautionary and Liquidity Line imposing relatively light constraints on policy.
However, they said government officials believed it "would not be a tragedy" if the talks resulted in a precautionary standby arrangement -- with tougher conditions and regular monitoring.
Asked about the details of the December 9 note, a government official said the specifics of any agreement would emerge during talks expected to start in January.
"This issue is in a preparatory stage, how it unfolds will be decided in concrete negotiations," State Secretary Zoltan Kovacs said. The IMF's representative in Hungary, Iryna Ivaschenko, was not immediately available for comment.
A team of IMF/EU delegates will visit Budapest between December 13-16 for informal discussions to prepare for official talks on aid. Ivaschenko said in a statement on Thursday the talks would also touch upon "recent budgetary developments."
Hungary's surprise move reversed a year and a half of policy when the government had spurned IMF help and pursued measures such as windfall taxes on banks, rechannelling money from a privatized pension scheme back to the state, and a plan to let households repay foreign currency mortgages at highly favorable exchange rates.
The renewed approach to the IMF failed to avert a one-notch ratings cut by Moody's to "junk," which cemented a rise in bond yields above 8 percent and pushed official interest rates to a two-year high.
Rival rating agencies Fitch and Standard & Poor's, both of which rate Hungary on the brink of "junk" status with a negative outlook, have said their assessment of the country depended to a large degree on the outcome of its talks with the international lenders.
Hungarian Prime Minister Viktor Orban said in Brussels on Friday that his government would have to overhaul the 2012 budget due to poor growth and a weaker forint in a dramatic shift from indications for "minor" changes just days earlier.
With its economy drifting towards stagnation or even recession and funding costs prohibitively high, the government said only a "safety net" type of IMF/EU deal could ensure it has continued access to market funding.
Hungary needs to roll over 1.82 trillion forints in maturing forint-denominated debt and 1.37 trillion worth of foreign currency debt next year, including 3.34 billion euros worth of previous IMF funding from a 2008 rescue loan. ($1 = 0.7482 euros)