By Krisztina Than

BUDAPEST, Sept 9 (Reuters) - Investors are breathing easierafter Hungary's government bowed to pressure from markets andthe European Union and pledged to cut its fiscal gap but it willremain under pressure until it produces a credible 2011 budget.

The announcement on Wednesday that Budapest would aim for ashortfall below Brussels' ceiling of 3 percent of gross domesticproduct was a complete U-turn for Viktor Orban's government,which had for months turned its back on outside aid and eschewedbudget austerity as it tried to pull Hungary out of recession.

But even if the shift was what market players wanted tohear, analysts said months of communication gaffes and attemptsto wiggle out of commitments by Orban's cabinet meant they wouldbe sceptical until they saw concrete steps to achieve it.

"When facts change, we change our mind," said ChristianKeller at Barclays in London.

"(The) announcement regarding fiscal policy by itself is notenough for such a change of mind, and we remain sceptical fornow. However, it could be a first step."

Markets gave a thumbs up to the decision, helped by improvedglobal risk appetite. Debt yields dropped and Hungary raised itsbond sales at an auction on Thursday. The forint <EURHUF=D2>gained 0.8 percent to 284.70 to the euro.

But that was still far weaker than the 264 per euro inApril, when Orban's Fidesz party swept to power, while the costof insuring Hungary's debt is still double, with the 5-year CDSat around 376 basis points, versus 190 in March <HUGV5YUSAC=R>.


Having cornered an unprecedented two-thirds majority in theApril vote, Orban declared he would fight to regain Hungary'sfinancial independence and "economic sovereignty".

That included rejecting a new financing deal with theInternational Monetary Fund, a blow to market watchers who sayHungary will be very exposed in the event of another bout ofinvestor flight or a dip back into recession for the globaleconomy.

Keller said what was needed now were additional statementsfrom Orban confirming the government's fiscal commitment andconcrete details on how it would cut the deficit to below 3percent of GDP in 2011, from a goal of 3.8 percent this year.

If Orban's government delivers, it would likely sootheinvestor jitters, attract more demand to local bond tenders anddrive down the cost of financing.

"The announcement is of vital importance as this is exactlywhat market participants and rating agencies expected to see -thus it was critical in creating room for Hungary to safelyfinance its deficit," said CIB Bank analysts in a note.

"The government's declared commitment to the original budgettargets... may cause its risk premium to drop."

But risks remain. Twists and turns in the government'spolicies in its few months in power have eroded its credibilityand global investor sentiment remains fragile, keeping thepressure on its forint currency.

Some analysts said Wednesday's announcement recalled eventsin June when the government swiftly committed to this year'sbudget target after a market sell-off due to confusing commentsfrom some Fidesz officials likening Hungary to Greece.

"This feels like June where there was a same about face butthen slippage back," said Peter Attard Montalto at Nomura.

"What I think is going on here is a deliberate attempt tocalm the market and appear onside with EU around deficitreduction in the short term," he added. "But there is no seriouscommitment to consolidation behind this."


A particular worry is the Swiss franc, which hit an all timehigh against the forint this week.

Also influenced by a weak euro, the franc has put hugepressure on hundreds of thousands of Hungarians who owe on francloans taken in the belief that the forint would continuestrengthening against it, the euro, and the dollar.

The forint slid to an all time low past 226 versus the francon Wednesday <CHFHUF=>. It recovered only to 221 on Thursday,still about 30 percent weaker from levels where most of theloans were taken out prior to the 2008 crisis.

With the political focus on municipal elections on Oct. 3,some analysts said uncertainties over next year's budget wouldlikely prevail until mid-October when the economy ministry hasto put down a first draft.

After that, there also remains the risk that the governmentmay drift back into talks with the IMF over support. Analystsare deeply divided over the chances of such a shift and it maysimply depend on how the situation on markets plays out.

"The current unfavourable global market mood and thecautious reaction of market participants to the government'scommunication are likely to limit positive impacts in the shortrun, especially before the municipal elections," CIB Bank said.

"I think we will see some calming down for one or two daysthen again increased volatility and forint weakening," acurrency dealer in Budapest added. (Reporting by Krisztina Than; editing by Patrick Graham)