An ambitious plan from the MNB on government debt

HUNGARY - In Brief 02 Mar 2019 by Istvan Racz
On February 27, MNB governor Matolcsy, who is reappointed now for another 6-year term in his office, starting with March 4 2019, revealed an ambitious and somewhat perplexing plan regarding government debt. He said that in the future, all government debt 'will have to be' in domestic hands, and this optimal situation will likely be possible to reach in six years from now. Even though the MNB's and the government's strong home bias is well known on this subject, this kind of extreme formulation of the self-financing concept sounds somewhat surprising and raises questions.The first question is why the central bank governor is talking about a far-reaching plan regarding government debt, instead of the finance minister whose job this would naturally be. Our best guess is that there must be an ongoing discussion with the government and a great deal of agreement between them regarding this subject. At least this is suggested by a recent statement by finance minister Varga, who said that the stock of the so-called household bonds (HUF 7500bn or 26% of total debt at end-2018) should be doubled in five years. In addition, PM Orbán also made a comment in the same direction, although he appeared more cautious than Mr. Matolcsy, saying he was not sure that six years will be enough to put all government debt into domestic hands, and that it will be the finance minister's job to propose a specific timeline.The second question is why exactly ALL debt must be held by domestic investors. Of course, we agree on the risks associated with any substantial degree of FX, nonresident and wholesale investor participation in the purchase of government debt, but that should not necessarily imply...

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