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Given a deal between Hungary and the International Monetary Fund over a loan programme is now unlikely to materialise, Fitch Ratings said it's "very unlikely" it will offer Hungary an upgrade back to investment grade in the "near future."

Budapest announced on January 14 that it has hired international banks to arrange a roadshow to test the waters for a possible Eurobond issue later the first quarter. A bailout from the IMF has been all but dead since the final couple of months of 2012, but the plan to issue international debt appears to be the final nail in its coffin.

According to Bloomberg, Fitch Ratings Director Matteo Napolitano told a conference in Poland on January 18: "We no longer expect an International Monetary Fund deal to happen and this may ultimately have a negative effect on long-term economic performance."

Fitch is the first institution to publicly state that opinion, and it does so even as Budapest's main negotiator with the IMF, Mihaly Varga, claimed the Washington-based lender is coming back to town to resume talks. However, analysts point out that the visit is actually a regular supervisory trip connected to Hungary's €20bn loan from the IMF taken in 2008. Indeed, Varga's words are more likely an effort to extend the protection from the markets that Hungary has so successfully leveraged by dragging out the prospect of an IMF deal over the past 12 months or so.

As analysts at Equilor Research noted: "We see that parallel to the depreciation of the [forint], the government tries again to calm market participants by keeping IMF talks on the agenda." The currency dropped sharply over the last week or so in reaction to a suggestion from Economy Minister Gyorgy Matolcsy that a strong forint is a mistake.

Hungary, which has not issued international debt since May 2011, appears to have finally been tempted to drop its IMF act by the ongoing emerging market bond rally, which has seen yields of its Central European peers fall to record lows. It is also facing over €5bn in debt repayments this year.

However, the abandonment of any pretense to secure a bailout from the IMF and EU leaves Budapest heavily exposed to any tailing off of the money flowing into emerging market debt as investors hunt for better returns. In that event, investors would become more sensitive once more to local fundamentals.

Napolitano flagged up the main issues - namely the government's "unorthodox" economic policies, which has seen large foreign investors hit hard, in particular the banks. That has seen domestic lending all but dry up, exacerbating the drop in investment and economic growth.

However, the effect on the forint of Matolcsy's recent words flag up the new danger occupying the market. With central bank governor Andras Simor - a staunch opponent of the government's push for monetary easing - set to leave his post in March, Timothy Ash of Standard Bank says the "bigger question mark for the market" now is who will be his replacement.

While Prime Minister Viktor Orban is clearly intent on appointing a figure close to his administration, the nightmare scenario for the market - that the post goes to Matolcsy - also looks the most likely. The economy minister has in recent weeks spoken of "strategic" teamwork between the government and the Magyar Nemzeti Bank, argued that the central bank's fight against inflation with a strong currency is a mistake, and called on it to pursue more unorthodox tools.

Should the appointment go through, the market reaction is likely to be sharp. "Matolcsy's intervention must be viewed as a call for a weaker [forint]," Ash wrote recently, "and indeed the market has responded by selling the currency. We think Matolcsy's logic is simply wrong. We would argue that the recovery in Hungarian markets in 2012, and the sovereign's ability to finance itself, was largely the result of the stability/strength of the [forint], admittedly helped by expectations of IMF financing in the offing. Moreover, given the weight of [foreign exchange] liabilities of households, corporates and banks (the external debt/GDP ratio is still high at over 130% of GDP), a move to weaken the currency will more likely prove counter-productive and growth subtracting, by increasing debt service payments."