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Hungary Table of Contents


Financial Instruments

Before reforms were enacted in 1983, enterprises had no options other than depositing their after-tax profits in bank accounts or investing them in their own operations, and individuals had no options other than maintaining savings accounts or investing in housing or real estate. In 1989 enterprises could deposit funds at a number of banks; invest in their own plants; lend money to other enterprises through inter-enterprise loans; and buy, issue, and trade stocks and bonds. Individuals could invest their funds in a savings bank, purchase bonds, lend money to other individuals, or invest in silent partnerships. The government hoped the development of these new investment opportunities would boost enterprise-profit and personal-income incentives, encourage voluntary savings by enterprises and the population, funnel more capital to efficient enterprises and more productive endeavors, and conversely reduce the capital flow to inefficient enterprises and wasteful projects. In 1989 it was still uncertain whether these reforms would produce the desired effects.

The government allowed agricultural cooperatives to issue up to 200,000 forints (approximately US$3,225) in bonds to members as well as nonmembers beginning in 1984, and the authorities later expanded the right to issue bonds to industrial and other enterprises. In 1987 enterprises issued bonds worth about US$354 million, up from US$87.3 million the year before. Bond issuance accounted for about 7 percent of total private savings and about 10 percent of total investment. By early 1988, banks, enterprises, local councils, agricultural and industrial cooperatives, hospitals, and other entities had issued about US$500 million in bonds. About 100,000 individuals owned 60 percent of the bonds; institutions held the remainder. Returns ranged from 9 to 12 percent and were higher than the interest paid on savings accounts. The government taxed interest on bonds issued after January 1, 1988, at a flat rate of 20 percent.

In early 1987, the government legalized the capitalization of enterprises through the sale of stock without prior authorization. By early 1988, investors had purchased about US$555 million worth of stock in sixteen banks and about fifty enterprises and joint ventures. In the same year, about twenty financial and banking institutions founded a small stock exchange. The exchange opened for trading only once every two weeks, but its founders hoped to expand its operation and introduce a fully computerized trading system. Trading was limited because the government, through the Hungarian National Bank, owned most of the shares. By 1989 at least one enterprise had launched an employee stock ownership plan, and the government had proposed a law lifting existing restrictions on employee stockholding in order to tap uninvested individual savings and give employees a sense of common purpose with their enterprises. The opening of stock and bond markets prompted former Ministry of Finance employees to create a private company to perform independent assessments of individual enterprises.

Data as of September 1989