Hungarian settlement bonds under fire

There is rising public pressure on Hungary’s government to terminate settlement bonds, which essentially give foreign nationals legal residency in return for payment. The government claims the revenue is good for business, while opponents maintain that the bonds are a mere money-laundering vessel and open up the country and the EU to dangerous individuals.

Photo: Elekes Andor, wikimedia commons

In 2013, Hungary introduced a new product to the palette of its government bonds. 1

Initially costing 250,000 euros, the so-called settlement bonds were offered worldwide as an investment opportunity that produced yields and more importantly, residency in Hungary, which allowed investors legal access to the EU; essentially, buying citizenship.

Settlement bonds – although constantly criticized by the press and opposition parties – were recently pushed to the forefront of public interest when the radical Jobbik party chose the issue as a bargaining chip. 2

The party, which is the most viable challenger to the governing Fidesz party, said it would only give the the parliamentary support needed to pass a two-thirds-backed constitutional amendment to block the EU dictated migration quotas, if there was a repeal of settlement bonds legislation.

As Jobbik argued, the government’s push to protect the country from migrants, should also apply to wealthy arrivals, who have the means to pay for entry. The party’s representatives claim that settlement bonds pose a far bigger threat than the EU-proposed migrant placement quotas, making it easy for members of terror groups or loyalists to the Islamic State to gain legalized entry into Hungary. Also, they recited the general notion that those who buy the bonds significantly contribute to the wealthy elite close to governing political circles.

Jobbik chairman Gabor Vona met with Prime Minister Viktor Orbán to discuss the matter in October 2016. 3

However, Jobbik’s demands for settlement bonds’ use to be immediately terminated were not met, and the government’s push to solidify anti-migrant efforts in the country’s Constitution was unsuccessful.

Unconventional money

In the wake of the financial crisis, after the right-wing Fidesz party led by Orbán swept to victory during the 2010 general elections and managed to secure a parliamentary supermajority, the Hungarian government resorted to several unconventional, often controversial measures to bolster the country’s flailing finances. The government targeted special taxes on profitable industries, mainly with a bias against foreign-owned banks, (which Fidesz blamed for contributing to the severity of the financial crisis by offering Swiss-franc denominated loans), and also decided to nationalize the wealth amassed in privately-run pension funds, that amounted to approximately 10% of the country’s annual GDP. 4

These measures only further aggravated Hungary’s international perception among investors, which was already poor as a consequence of its economic outlooks, which were frequently discussed alongside Greece. The government’s policies also posed risks to international companies and partners’ interests. This culminated in all three international rating agencies – Moody’s, Fitch and S&P – casting Hungary into so-called “junk bond status,” formally sealing off a number of institutional investors and discouraging others from entering or staying in the market. 5

However, since 2010 the turnaround has been marked: Hungary is now surpassing the EU average for economic growth, has phased out most extra taxes, is in the process of reducing the bank tax, and analysts are predicting a 4% increase in the country’s GDP for 2017. This paired with record-low levels of unemployment, encouraged the rating agencies to end Hungary’s junk bond time-out in 2016. 6

Symptom of the system

The main concern with settlement bonds, is that they offer significant rewards for money alone, without any questions about where said money comes from. By making the necessary initial investment, waiting a five-year period and meeting some other manageable formal requirements, those purchasing settlement bonds are basically granted Hungarian citizenship, and thus EU citizenship as well. 7

This scheme is not unique to Hungary though; several EU countries (including Malta and Portugal for example) have introduced similar opportunities. 8

Critics, however, say that anybody with the right amount of money can achieve good legal standing within the Schengen Zone, skipping background checks in the process. Since there are no questions asked about the source of the money, they could potentially come from offshore funds, or even illegal activities.

The distribution of the bonds is also widely criticized, because the sales agents abroad are handpicked by parliament’s economic committee, which has offered zero transparency in their agent selection process, and provides little information about many of the country’s foreign retail partners. 9

Since the time of its launch, prominent Fidesz party member, Antal Rogan, often criticized by for his lavish lifestyle, was the head of the economic parliamentary committee.  As a recent series of investigative articles have reported, the settlement bonds have widely been seen as the primary source of his wealth. 10

Several reports have also linked other local businessmen friendly with the government to the settlement bond business, and the international network involved includes a number of shady figures. Furthermore, based on the agency network, these financial products are targeted at countries that aren’t under the scope of important international treaties, or countries that are downright offshore havens. 11

In 2013, the Special Debt Fund managing the settlement bond product received the authorization to sell bonds in China and Vietnam. Furthermore, two firms have recently been established – Special Funds Discus Holdings in Malta and Innozone Holdings in Cyprus – the former selling bonds in South Africa, Indonesia, Kenya and Nigeria, and the latter in Cyprus and India. 12

Migrant debate

The migration situation has returned settlement bonds to the fore – more precisely Hungary’s very strong and vocal position on the migration question. Orbán was among the first European leaders to frame migration as a potential threat to the continent, and then the ensuing terror attacks in France and Belgium only substantiated his party’s message. When the EU introduced mandatory migrant quotas to ensure each member state’s responsibility in a migration solution, Hungary was an ardent protester, very publicly adopting anti-immigration policy.

The government went even further, calling a referendum so that Hungarians could demonstrate their will regarding what they considered a decree from Brussels being imposed on Hungary. The government campaigned very strongly utilizing the media and billboard space, and government officials relentlessly testified about the importance of maintaining the country’s ethnic and cultural integrity. 13

The campaign was highly driven, even though the vote technically had no impact. If approved, the quota would have been a legal requirement that all member states had to implement, regardless of public opinion. Yet the referendum asked Hungarians: “Do you want to give the EU the authority to mandate the accommodation of non-Hungarian nationals in Hungary without parliamentary approval?”

As predicted, the outcome of the plebiscite fell short of the 50% turnout benchmark that would have validated it, but of those who did vote, 98% rejected the migrant quota. 14

Orbán said that even though turnout fell below the legal requirement, millions of Hungarians made their voices heard, expressing their resentment towards Brussels for imposing serious legal changes that would impact the country’s future.

Although the government often calls the immigration quotas a “dictate,” they were approved by the European Council and in line with various EU treaties that Hungary ratified. That still did not prevent Fidesz from initiating an amendment to the Constitution that would make their stance part of the country’s fundamental law. 15

However, without Jobbik’s support, the parliamentary opposition could not be overcome, and the constitutional amendment was dropped.

Ever since, the governing party has repeatedly rhetorically portrayed itself as the only party striving to protect the interests of the Hungarian people, a goal, according to Fidesz, that its political opposition is deliberately obstructing. 16

The business angle

A recurring theme in the government’s arguments in favor of the settlement bonds was that they presented a good means of acquiring foreign currency inflows to finance the country’s maturing forex debts. Economy Minister Mihaly Varga told a parliamentary committee that for the past few years, the settlement bonds were almost exclusively responsible for all forex inflow, since the country, in line with its debt financing strategy adjustments, was not issuing any foreign currency bonds. 17

Currently, Hungary’s public debt accounts for 74% of its GDP, but it is slowly and steadily dropping. The country’s economic vulnerability has been greatly reduced by relying more on forint-based financing, as opposed to forex debt since the 2008 financial crisis. This was supported by the conversion of forex, mostly Swiss franc-based mortgages to forints, the debt management agency’s premiums offered to household government bond-buyers, as well as the National Bank of Hungary, which has reshaped the market to hold commercial banks to buy substantial government bond quantities, also for forints. 18

The government’s arguments for accepting untraceable money purely for business considerations has been questioned, because the basic concept, which also saw the renewal of forex debt from forints and the strategy being continued reliance on domestic sources.

Given that Hungary was lifted out of its junk bond rating by all three major international agencies after four years, an unwarranted long period of time according to most experts, it now has the option to consider substantial forex issuance at far better terms than a sovereign with a below-investment rating. Accordingly, Mihaly Varga has already stated that settlement bonds, in their current form, are obsolete and will definitely be reconsidered. This could mean they will be phased out totally or their conditions revised, but Varga said there is very little chance they will stay in circulation as they are now. 19


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  14. “Hungary’s refugee referendum not valid after voters stay away,” Guardian, October 2, 2016, (accessed December 5, 2016).
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  16. “Megbukott Orbán alkotmánymódosítása,” 444, November 8, 2016, (accessed December 5, 2016).
  17. “Varga Mihály elismerte, hogy a letelepedési kötvényen tulajdonképpen bukik az állam,” 444, October 28, 2016, (accessed December 5, 2016).
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  19. “Varga Mihály átalakítaná a letelepedési kötvényt,” Origo, October 18, 2016, (accessed December 5, 2016).
Gergő Rácz

Gergő Rácz

is a Hungarian journalist covering the country's business and finance beats. His work covering important fiscal and monetary stories have been published by Interfax and Dow Jones Newswires, as well as domestic publications such as the Budapest Business Journal, Napi Gazdaság and Magyar Idők.