“Getting Over” National External Indebtedness – Or Is Baron Munchausen’s Story Not a Mere Fairy Tale After All?

Abstract

The question of this article is how it was possible for the Hungarian economy to set on a growth trajectory after a W-shaped crisis despite a continuous and severe withdrawal of external resources. The country’s net external debt relative to GDP dropped by nearly 30 percentage points within five years, representing a 5–6 percentage point reduction per year. Why has the economy not suffered an even greater setback as a result of such a rate of “loss” in financing resources? Is growth possible without resources? Obviously not. This paradox was resolved when sources of financing were re-channelled into the internal supply of sources. The reason is that financing is similar to an electrical network: if connections are weak, power is lost. The country’s excessive openness caused a significant loss of power (as tackled in this study), so the closing and reconnection of the money circuits to the internal resource supply (as amply illustrated in this study) increased the “power supply” to the economy. Numerous actions taken by the national bank and the government took the country in this direction. From the area of financial regulation, the authors have selected the steps of allowing the moderate weakening of the Hungarian forint, the conversion of Swiss franc loans into forint loans, and the Funding for Growth Scheme (FGS). With regard to government measures, the focus is placed on cutting employment taxes, promoting community work, curbing monopoly profits, and channelling retail savings into financing sovereign debt. All this has set the economy on a trajectory where self-healing mechanisms have had an opportunity to start. Applicable financial funding of the national economy was an important key in answering the question raised in the article. Nevertheless, our other conclusion is that there is much to be done in the financing of corporations in a similar direction of funding.