Saturday, October 30, 2010

Hungary and sovereign default

It's almost official: the government's ingenious plan is to nationalize compulsory private pension savings and spend it on current budget expenses (pensions) and debt reduction. They hope it will enable them to survive without major restructuring and action until the tax cuts will bring 7% GDP growth. (Actually many expressed doubts, how realistic this expectation could be. Some calculate that 8-10% growth would only fill the holes of the budget from 2013.) Anyhow, the government expects 90% of the mambers of such private pension schemes will return to the state run, pay-as-you-go system, eventrually transferring their portfolio to the state. The delicacy of the issue: it is nothing else than default on a part of the debt and restructuring.

Private pensions savings, although compulsory, are private property. They hold about 2800 billion HUF savings in sovereign bonds (circa 1300 billion) and other assets, mainly stocks and investment funds. It means at around 5% of the GDP is in the hands of these private as government issued bonds. As soon as they transfer it to the government they will be rewarded with a promise of a state pension and their portfolio transformed into state property. Obviously the state will never be obliged to redeem them, it will reduce the debt. It is not a straightforward way of default and debt restructuring, but in its essence it is nothing else. Government liabilities at private debtors are declared void and exchanged to another type of government liablity. At the moment it is - nominally - voluntary. However, the pirme minsiter expressed his firm conviction that as much as 90% ot the members of private pensions schemes will choose the satte run system in two months time. As this number is highly unrealistic on a voluntary basis one could expect legislation making it compulsory, transforming the process in a confiscation. Especially in the light of Fidesz's willingness to reduce the jurisdiction and competenc eof the Constitutional Court, barring it from judging the constitutionality of economic legislation.
Hungary in fact defaulted today...

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