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In an attempt to ride wave of the emerging market bond rally, Hungary will test investors' appetite for a foreign currency bond issue without an International Monetary Fund (IMF) deal in place in the first quarter of 2013, the minister in charge of the now practically defunct talks over a bailout said on December 11.

Speaking at a conference, Mihaly Varga was quoted as saying by the Wall Street Journal that as long as favourable market conditions persist, state debt agency AKK "will surely test the markets in the first quarter, and that could take the form of concrete" action. The official noted that the government recently received updated feedback from investors who had previously linked purchases of its sovereign debt to a deal with the IMF and EU over a loan programme.

Varga claimed that in the wake of last week's better-than-expected dollar bond issue of Hungarian state-owned Eximbank, some institutional investors, who had made an IMF loan a prerequisite for financing the country, indicated they are now ready to buy regardless of an IMF deal being in place. The $500m five-year issue by the state-owned bank - clearly planned as a test for the sovereign - was oversubscribed by more than four-times, prompting the issuer to reduce its yield guidance to 5.75% from 5.875%.

Budapest first applied to the IMF in November 2011 as its forint and sovereign yields were hit hard by the market's discomfort with the government's erratic "unorthodox" economic policy. The move worked, pulling the assets back into line as investors bet that an agreement would temper Budapest's more extreme tendencies, and the market has been loath to abandon that stance throughout a year of toing and froing by Prime Minister Viktor Orban.

However, as some suggested all along, it appears to have been a ruse to buy time - known as "doing a Turkey". With the emerging market bond rally still pushing yields to new lows for all of Hungary's Visegrad neighbours in the fourth quarter, Budapest has upped its erratic policy-making, prompting the IMF to decline to return in 2012 to continue the talks.

However, Hungary is still gamely trying to string the markets along. Varga claimed during the same conference: "As long as there's a chance to reach a 'sober' compromise [with the IMF], we need to continue the coordination and the negotiations." Official talks are not currently underway, he admitted, but said the IMF will visit Hungary on January 14-26.

That visit however, is likely to be a regular review of the country's 2008 loan, and the IMF has stressed in the past that it will not mix the two topics. At the same time, foreign-currency debt situation is an issue that has been closely watched throughout the last 12 months, with most - including Hungary - accepting that it would constitute an admission that Budapest has no intention of agreeing a deal with the IMF, and will try to make it through the crisis on its own.

The need to refinance that previous IMF loan will make a significant contribution to the large amounts of maturing foreign currency debt in the first quarter of next year, which prompted Hungary to announce in late November that it intends to issue its first international debt in over a year. While the country's generous trade surplus has allowed it to keep its head above water through 2012, the volume of due debt will stretch current forex reserves.

The central bank's international reserves dropped to €33.87bn at the end of November, their lowest since February 2011, on the back of a maturing €1bn foreign currency bond and redemption of about €665m to the IMF.

While the country's domestic debt sales have gone well, it was last in the international market in 2011, with yields approaching 9% at points in the meantime. However, with even the likes of Ukraine - which is in perhaps worse shape economically and politically - getting sovereign issues away recently below that level, Budapest clearly feels it must strike before the liquidity driving the rally starts to run dry.