* Hungary ups bond sale, forint firms after budget pledge
* Investors sceptical, await details on 2011 budget
* Volatility to prevail, forint seen prone to weakness
By Krisztina Than
BUDAPEST, Sept 9 (Reuters) - Investors are breathing easier after Hungary's government bowed to pressure from markets and the European Union and pledged to cut its fiscal gap but it will remain under pressure until it produces a credible 2011 budget.
The announcement on Wednesday that Budapest would aim for a shortfall below Brussels' ceiling of 3 percent of gross domestic product was a complete U-turn for Viktor Orban's government, which had for months turned its back on outside aid and eschewed budget austerity as it tried to pull Hungary out of recession.
But even if the shift was what market players wanted to hear, analysts said months of communication gaffes and attempts to wiggle out of commitments by Orban's cabinet meant they would be sceptical until they saw concrete steps to achieve it.
"When facts change, we change our mind," said Christian Keller at Barclays in London.
"(The) announcement regarding fiscal policy by itself is not enough for such a change of mind, and we remain sceptical for now. However, it could be a first step."
Markets gave a thumbs up to the decision, helped by improved global risk appetite. Debt yields dropped and Hungary raised its bond sales at an auction on Thursday. The forint
But that was still far weaker than the 264 per euro in April, when Orban's Fidesz party swept to power, while the cost of insuring Hungary's debt is still double, with the 5-year CDS at around 376 basis points, versus 190 in March
MORE DETAILS
Having cornered an unprecedented two-thirds majority in the April vote, Orban declared he would fight to regain Hungary's financial independence and "economic sovereignty".
That included rejecting a new financing deal with the International Monetary Fund, a blow to market watchers who say Hungary will be very exposed in the event of another bout of investor flight or a dip back into recession for the global economy.
Keller said what was needed now were additional statements from Orban confirming the government's fiscal commitment and concrete details on how it would cut the deficit to below 3 percent of GDP in 2011, from a goal of 3.8 percent this year.
If Orban's government delivers, it would likely soothe investor jitters, attract more demand to local bond tenders and drive down the cost of financing.
"The announcement is of vital importance as this is exactly what market participants and rating agencies expected to see - thus it was critical in creating room for Hungary to safely finance its deficit," said CIB Bank analysts in a note.
"The government's declared commitment to the original budget targets... may cause its risk premium to drop."
But risks remain. Twists and turns in the government's policies in its few months in power have eroded its credibility and global investor sentiment remains fragile, keeping the pressure on its forint currency.
Some analysts said Wednesday's announcement recalled events in June when the government swiftly committed to this year's budget target after a market sell-off due to confusing comments from some Fidesz officials likening Hungary to Greece.
"This feels like June where there was a same about face but then slippage back," said Peter Attard Montalto at Nomura.
"What I think is going on here is a deliberate attempt to calm the market and appear onside with EU around deficit reduction in the short term," he added. "But there is no serious commitment to consolidation behind this."
HOLDING PATTERN
A particular worry is the Swiss franc, which hit an all time high against the forint this week.
Also influenced by a weak euro, the franc has put huge pressure on hundreds of thousands of Hungarians who owe on franc loans taken in the belief that the forint would continue strengthening against it, the euro, and the dollar.
The forint slid to an all time low past 226 versus the franc on Wednesday
With the political focus on municipal elections on Oct. 3, some analysts said uncertainties over next year's budget would likely prevail until mid-October when the economy ministry has to put down a first draft.
After that, there also remains the risk that the government may drift back into talks with the IMF over support. Analysts are deeply divided over the chances of such a shift and it may simply depend on how the situation on markets plays out.
"The current unfavourable global market mood and the cautious reaction of market participants to the government's communication are likely to limit positive impacts in the short run, especially before the municipal elections," CIB Bank said.
"I think we will see some calming down for one or two days then again increased volatility and forint weakening," a currency dealer in Budapest added. (Reporting by Krisztina Than; editing by Patrick Graham)