Hungary Gets First Prize for Creative Deficit Reduction

By Marc Champion: You have to hand it to Hungary's ruling Fidesz party. They are way out front when it comes to finding ingenious ways to plug the country's gaping deficit -- while not doing what the International Monetary Fund and common sense say they should.
The latest proposals include one to borrow at least 60 billion forint ($272 million) from Hungarian citizens by selling them euro-denominated bonds. Another would grant residency to foreigners willing to buy 250,000 euros of Hungarian government bonds.
True, deals that trade visas for investment aren't unique: The U.S. fast-tracks green cards for foreign job creators, and a new Senate proposal calls for foreign investors in residential property to get visas to stay in the U.S. But trading residence for loans, especially if the deal provides access to another 25 countries, would be new.
The Eurobond issue would prove problematic and costly. The bonds will pay an interest rate of euro-area inflation plus 2.5 percentage points, or today about 5.2 percent. That's more than what Hungary would pay to borrow far more significant sums from the IMF. But because Prime Minister Viktor Orban and his government don't want to sign up to IMF conditions, Hungary has to pay more.

The other problem with the plan is that it's likely to exacerbate Hungary's credit drought. The government introduced some radical economic policies on taking power, including a flat income tax that promptly reduced tax revenues and grew the budget deficit, while failing to stimulate the economy. The government responded with special measures, such as an extra tax on the country's mainly foreign-owned banks. The banks responded by reining in corporate lending, further cutting the country's growth prospects.
Selling Eurobonds would exacerbate that problem by sucking foreign currency deposits out of the banks and giving them a lower capital base on which to lend. Still, it's certainly a creative response to the debt crisis. Source

Apparently, they took Mr and Mrs Keiser's advice!

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