* Hungary plans to return gradually to market financing
* No room to soften 2010 budget target, more savings needed
* Banking system stable, even under extreme scenario
(Adds comments, detail, background)
By Krisztina Than and Marton Dunai
BUDAPEST, July 1 (Reuters) - Hungary plans to issue a eurobond by the end of September, as it gradually returns to market financing, capitalising on growing investor confidence in the government's policies, Finance Minister Peter Oszko told Reuters on Wednesday.
Oszko noted that painful budget measures affecting Hungarians had been passed by parliament. But he said more savings were needed in state administration to reduce the budget deficit to 3.8 percent of gross domestic product (GDP) next year from 3.9 percent in 2009.
On Monday parliament approved 2010 tax changes which were seen as a key test for the minority government and a backbone of Hungary's financing deal with the International Monetary Fund (IMF) secured last year.
"The first task was to prove to ourselves and the world that this job could be done; this period ended with Monday," Oszko said in an interview.
Hungary has mandated several banks to arrange meetings with fixed income investors for a non-deal road show which Oszko said will be held next week.
"We want to test in the upcoming period ... how much market financing can be used. It's important that from the IMF there is an offer and possibility for further financing if necessary, but first we must work to see how we can attract financing from the market and how much this financing can be," Oszko said.
When asked if Hungary could issue a eurobond by the end of the third quarter Oszko said: "By the end of the third quarter, this is part of our plans."
He declined to comment on the possible size of the offering.
The Czech Republic sold 1.5 billion euros' worth of 5-1/2 year bonds on international markets in April. But Hungary, which had to resort to a $25.1 billion IMF-led rescue package last October to avert financial meltdown, has not tapped international markets since the first half of 2008.
Prime Minister Gordon Bajnai's government, which took office in April, has passed spending cuts affecting the pension system and state subsidies. It has also implemented a shift in the tax system by raising the top rate of value-added tax and cutting taxes on labour to help the economy recover from a deep recession.
Oszko said this year's budget deficit target was realistic, based on the government's forecast of a 6.7 percent contraction in the economy, as most of the fiscal steps take effect from Wednesday.
"I'm not reckoning with fully using up our budget reserves, but obviously the second half of the year is still ahead of us," Oszko said.
NO ROOM TO LOOSEN SPENDING
Oszko said he has not felt pressure from the ruling Socialist party, which suffered a crushing defeat in European elections last month, to loosen up next year's budget before parliamentary elections scheduled for April or May 2010.
He said the government would not be a partner to pre-election spending.
"I don't think there is room to modify the cornerstone budget figures. A debate could be opened about priorities in social policy... but we will not have more money," he said.
Hungary has a record of spending sprees before elections which led to massive deficit overshoots in the past and eroded trust in its economic policy-making.
Oszko said further savings must be made at local government level and in the transport system, mainly at railway firm MAV.
He also said parliament could hold the final vote on the 2010 budget in the middle or second half of November, instead of mid-December, as it is in the interest of the country to have a stable budget before the election campaign starts.
Oszko said the banking system was stable and its stability could be maintained even under an extreme scenario.
He cited a central bank stress test which he said shown that if the economy shrank by 10 percent and the forint weakened to 330 against the euro, banks would need a further 0.7-0.9 billion euros. The forint traded at around 270.60 at 1100 GMT.
"This stress test shows that even in an extreme scenario, the stability of the Hungarian banking system can be ensured," he said. (Reporting by Krisztina Than and Marton Dunai; editing by David Stamp)