Tim Gosling in Prague -

Hungarian assets saw a sharp pullback on February 27 as the markets suddenly woke from their daydream that a loan programme with the IMF and EU is a done deal.

The forint dropped by as much as 0.6% at points through the day, and yields on Hungary's benchmark 10-year bonds spiked 10 basis points to their highest since January, reports Bloomberg, as investors that have bet heavily that Budapest is on a reasonably swift and inevitable path towards a bailout - and most importantly, the conditionality that would accompany it - began to have second thoughts.

The warning signs have been there all along, but caught up with the general sentiment boost on riskier assets, the market has been trying not to notice. Until now that is, with investors suddenly sensing the danger that a deal is far from certain, and could be some way off even should it go through.

Although the government in Budapest has been switching between conciliatory and confrontational rhetoric for months, unconfirmed reports on February 25 that it will fight Brussels in the European Court of Justice rather than offer any further compromise in the dispute over the retirement age for judges spooked the market. With resolution of this particular issue one of the clear preconditions for starting talks with the IMF/EU, the prospect casts doubt on the speed of the process at least, if not the true intentions in Budapest.

At the same time, central bank Governor Andras Simor said in an interview released late on February 26, that Hungary has not received any indication of possible dates in preliminary meetings to discuss entering the negotiation process. Meanwhile, whilst many assume it won't actually be implemented, the European Commission's decision on February 22 to cut development funding to Hungary should it not rein in its deficit was another sign that the antagonism between Brussels and Budapest is deep and genuine.