Hungarian Bond Story

I was rummaging through some old stuff and found this:


Here is a close up of the legend:



As you can see this is a $500 Hungarian bearer bond issued in 1924. It is worn, but still pretty. This is how they printed money back then. They issued bonds. Sound familiar?

A bit of history. My father bought these and hundreds of others like it after WWII in Zurich, Switzerland. Czech, Polish, Yugoslav and Hungarian bonds. The pile was six inches high. They stayed in a closet until I got them in 1980. Years later, with the help of the Foreign Bondholders Protection Agency I was able to peddle the pile for a few pennies on the dollar. I kept this bond as a reminder.

There is a stamped legend on the front of the bond that says it was restructured in 1937. At that time the principal was rolled over to 1979. The interest rate was reduced to 4.5% from 7.5%. A forty-year extension of the principal, the yield was cut in half. A lousy deal for the bondholders.

Attached to a bearer bond are coupons which one clipped and sent to a bank for collection. The following is a picture of the remaining coupons. Presumably the August 1941 payment was made. But no effort was made to collect on the February 1942 coupon. Not hard to imagine why.


Fifty years later the $500 of principal and the $1,250 of accrued interest were worth $40.

In 1924 Hungary was a prosperous nation and could issue debt because people believed it would be paid back on a timely basis and in the meantime it was a “store of wealth”. Banks were suspect, but a sovereign credit was as good as gold. And this store of wealth could be transported across borders.

Things changed in the first 13 years in ways that could not be anticipated. An effort was made to formally restructure what were un-payable debts. The evidence is that partial interest continued for another five years and then it was worth nothing.

There are very few similarities to the Hungary of 1924/37/42 and Hungary/PIIGS/etc. of today. First and foremost there are no attractive looking, negotiable bearer bonds. But electronics has made the debts more mobile then ever. There is no war in Europe to destroy the value of a debt. Today there is just too much debt. That alone will destroy its value.

The observation is that many countries defaulted over the years. Every country south of Texas went bust in the 80’s. Each time the bondholders got whacked. Some debts just got rescheduled at a lower rate. Some paid nothing at all. The difference between 1945 in Europe and the problem countries in the EU today is that the numbers are so crazily large. The deflationary implications of restructuring a few trillion in debt are difficult to fathom. But history does have a way of repeating itself.

Another takeaway from a review of this bond is that it was backed by gold. Of course there was no gold. Only ink that said there was. And today we are still talking about this very same subject. Ink is not gold. Amazing how little things change.

 

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