Hungary's residency bond programme cost taxpayers €92mn

Hungary's residency bond programme cost taxpayers €92mn
Yield of residency bonds and secondary market yields of “standard” foreign exchange denominated government bonds.
By bne IntelliNews October 9, 2018

Hungary's residency bond scheme resulted in losses of up to HUF30bn (€92mn) to taxpayers in the four years it was in place, according to a study published by Transparency International Hungary (TI) and the Fiscal Responsibility Institute Budapest (FRIB) on October 8. 

The government had no reason to “finance itself from residency bonds sold to rich foreigners”, as it could have raised funds from the market at more favourable rates, the report says. 

Under the programme running from the summer of 2013 until March 2017, foreign nationals who bought securities from a licensed agent backed by the residency bonds could apply for fast-tracked permanent residency in Hungary and the Schengen Zone. The threshold for the purchase was set at €250,000, which was raised to €300,000 later on. 

The programme allowed for the long-term stay of 19,855 non-EU citizens, some of whom posed a clear national security risk, who received the permits without any reliable background screening.

Documents revealed that two Syrian men with ties to international criminal rings and the Assad regime had received residency permits through the programme. Investigative websites unveiled that influential Russian citizens, including politicians and the heads of state companies, had also been granted permanent residence status in Hungary.

Hungary raised some €1.7bn from the sale of the bonds but will have to repay €1.8bn to bondholders. At a 2.5% interest rate, residency bonds issued in 2013-14 were a cheaper source of financing than Hungary could have obtained from the capital markets.

This changed after 2014 as the country risk fell and financing conditions improved. Had the state debt manager opted for foreign-currency bond issuance on the market instead of the residency bonds, it could have saved €66mn.

Yield of residency bonds and secondary market yields of “standard” foreign exchange denominated government bonds (Source: HSDMC, Bloomberg Finance)

Hungary could have also opted for the European Investment Bank’s (EIB’s) long-maturity, low-rate credits, similar to the agreement signed last week, to finance the country’s debts. This would have resulted in a saving of €90mn, according to the study.

The figures show that soon after the introduction of residency bonds, Hungary's stock of loans from the EIB began to drop sharply. While the average value credit lines contracted between the Orban government and the EIB was €1.5bn between 2008 and 2012, from mid-2013 onward, the amount was half of that level.

End of period combined stock of EIB-loans and residency bonds (bn HUF)

The most heavily criticised aspect of the programme was that foreigners did not invest in the bonds directly, but did so through designated intermediary companies with opaque ownership structures. Of the eight selected, seven companies are registered in places considered as tax havens. The study found that the scheme allowed shady intermediary organisations to generate €192mn in profits.

Transparency International savaged the Hungarian government's residency bonds scheme "because it harmed George Soros's business interests,” the government communications centre replied defiantly to the 18-page document, backed up with charts, tables and detailed calculations of financing conditions going back to 2013. 

Hungary opted to repay the IMF loan between 2012 and 2016 "using retail forex and residency bonds". This is why "organisations financed by Soros keep slandering the residency bonds scheme," the statement said.