Hungary tempers EU deal hopes, PM heads to Brussels By Gergely Szakacs and Krisztina Than BUDAPEST (Reuters) - Hungary's Prime Minister Viktor Orban is hoping to move closer to a deal with the European Commission on Tuesday to rework laws critics say undermine democracy so he can revive stalled international aid talks. But his deputy tempered expectations of an agreement and revealed a potential point of conflict between Budapest and the Commission, which has threatened legal action if Hungary does not change laws on the central bank, courts and data protection. Orban's efforts to centralize power and stack Hungarian state bodies with party loyalists have drawn criticism from Brussels and Washington, which fear they stifle democratic freedoms in the ex-communist country of 10 million. He has lost a large part of his support at home, while the economy is heading for recession and investors' loss of confidence has pushed borrowing costs to above 9 percent. Analysts say Orban needs an aid deal to keep market access. He will meet Commission President Jose Manuel Barroso on Tuesday to present a timetable for legal changes. However, Deputy Prime Minister Tibor Navracsics said the aim of the meeting was not necessarily to clinch a deal that would give a green light for aid talks with the EU and IMF to resume. I do not know if either the prime minister or the president of the Commission have the ambition to strike an agreement today. The issues at stake are just not that pressing," he told public radio. A $13 billion private pension grab produced a rare fiscal surplus last year, buying Hungary some time before it must borrow 5 billion euros to fund repayments to bondholders and to the EU and IMF for an earlier loan. But the economic outlook is grim. The European Bank for Reconstruction and Development cut its forecast for Hungary's economy on Tuesday to a 1.5 percent contraction in 2012, its weakest outlook in emerging Europe. Orban in the past pledged to resist outside pressure from parties like the IMF and EU and take Hungary on its own course. But after rating agencies cut Budapest's debt to "junk," sparking a market selloff that drove the forint to a record low against the euro and pushed bond yields above a ruinous 11 percent, Orban promised to reverse some policies. This is a major political climbdown for the prime minister who swept to power in 2010 with the strongest political mandate in Hungary's post-communist history. It has also prompted the central bank to hike interest rates by 1 percent since November to shield assets from further investor flight, putting it in direct conflict with repeated government insistence that it cut rates to spur growth. The bank is expected to raise interest rates by another half point at a policy meeting on Tuesday. Orban's overtures to the EU and IMF have boosted market sentiment, pushing the forint 5.74 percent higher since it hit an all time low of 324.2 per euro on January 5. Bond yields rose up to 9 basis points on Tuesday after Navracsics's statement, but the debt agency completed a sale of three-month debt at a lower cost than the last tender. A top government official said on Monday that Hungary could have a new funding deal in place worth around 17-20 billion euros by March or April. Points of conflict remain, however. Navracsics said the government disagreed with a Commission demand that Hungary reverse a law lowering the retirement age of judges from 70 to 62, a move Brussels says infringes on judiciary independence. This is part of general pension reform. Our goal is, if possible, to have the general retirement age be actually general ... equally regarding judges, prosecutors and notaries," Navracsics said. Another issue is Hungary's budget, which EU finance ministers will discuss on Tuesday after the bloc warned it may suspend development funds next year if Budapest's budget exceeds the EU's 3 percent of GDP ceiling. Budapest says it will hit the target, but the Commission has said that without the pension asset grab last year's shortfall would have surpassed 6 percent of GDP, which makes the 3 percent goal difficult, particularly with a recession on the horizon. The government has repeatedly pledged to do what it takes to secure a deal, but analysts have expressed caution. There does seem to be a gap between what the international community think Hungary needs to change and what the Orban administration thinks it needs to do. This could complicate things," said RBS head of CEEMEA research Tim Ash. A recent Ipsos poll showed 84 percent of Hungarians surveyed thought the country was on the wrong track. "At least now I cut the expenses that weren't necessary to begin with," said Judit Fekete, a 34-year-old secretary. Writing by Gergely Szakacs and Michael Winfrey; Additional reporting by Marton Dunai; editing by Anna Willard