New Equity Indices for Hungary
Bryan Taylor, Chief Economist, Global Financial Data
One of the countries whose equity history has not been explored in detail is Austria-Hungary. Austria-Hungary is one of the few countries for which we have over 200 years of data for stocks, bonds and bills. The only countries with longer histories are the United Kingdom, France, and the United States.
The Vienna Stock Exchange has been in operation for over 250 years. Austria’s public debt began trading in Vienna in 1763, in Amsterdam in the 1780s and in London in 1795. Shares of the Austrian National Bank began trading in Vienna in 1816. Austrian railroads and banks traded on exchanges in Austria and Germany during the 1830s and by the 1870s, hundreds of shares traded on the Vienna Stock Exchange.
Before 1914, stocks from all areas of the Austria-Hungarian Empire traded in Vienna, but after World War I, the Austro-Hungarian Empire was broken up, and the regional exchanges in Prague and Budapest became the primary national exchanges for Czechoslovakia and Hungary. In 1948, the stock exchanges in Prague and Budapest were closed when the government nationalized major industries without compensating shareholders. The Vienna Stock Exchange remained open, but only in the 1990s did the Prague and Budapest exchanges reopen.
In 1913, Austria-Hungary represented about 3% of global market capitalization, but today, Austria represents only 0.10% of S&P’s Global Market Index of 50 countries and only 0.13% if you include Hungary and the Czech Republic. In 1913, the Austria-Hungarian Empire was one of the great powers of Europe, along with England, France, Germany and Russia. Vienna was a cultural center where Sigmund Freud, Guztav Klimt, Arnold Schoenberg and others contributed to the nation’s culture.
After World War I, however, Austria, Czechoslovakia and Hungary suffered dismemberment, absorption into Nazi Germany during World War II, and Communism in Czechoslovakia and Hungary after World War II. Today, 37 countries have stock markets whose capitalization exceeds Austria’s. The stock markets in Prague and Budapest are small and offer few opportunities for international investors. How well have the stock markets in Vienna, Prague and Budapest done over time?
The Austro-Hungarian Empire
Before World War I, the Austro-Hungarian Empire had one of the largest economies in Europe. The Empire included all of Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia and Bosnia & Herzegovina as well as parts of Poland, Ukraine, Romania, Serbia, Montenegro and Italy. It should be remembered that Austria stopped the Muslim invasion of Europe at the gates of Austria in 1529 and again in 1683.
Hungary was an independent country until the fifteenth century when Hungary reached its cultural and political height. After the Battle of Mohacs in 1526, Hungary was split between the Hapsburgs and the Ottoman Empire. The Congress of Vienna in 1815 established Austria as one of the four European powers along with England, France and Russia. A revolt against the Habsburgs in 1848 led to Russia intervening and helping to defeat the Hungarian rebels. The Hungarians continued their rebellion against Austria, and the Austro-Hungarian Compromise of 1867 created a dual monarchy with the two realms governed separately within the Empire. However, the empire was multi-ethnic and the different nationalities within the Austro-Hungarian Empire strived for independence.
Figure 1. The Austro-Hungarian Empire
Archduke Franz Ferdinand was assassinated in Sarajevo in 1914 which led to the onset of World War I. After Austria-Hungary’s defeat in World War I, the Austro-Hungarian empire was broken up under the Treaty of Saint Germain in 1919. This led to the creation of several new countries, Austria, Hungary, and Czechoslovakia, and the remaining parts of the Empire were allocated to Yugoslavia, Poland, Russia, Romania, Serbia and Italy according to their linguistic and cultural heritage.
Hungary was nationalistic and fiercely anti-communist after World War I. Hungary entered World War II as an Axis Power, but as the war turned against Germany, Hungary began negotiating with the Allies. Hungary was occupied by Germany in March 1944 and became a Nazi puppet state, but the Germans were driven out of Hungary by March 1945 and the country became a satellite of the Soviet Union. The Hungarian economy was devastated by the war and the Budapest Stock Exchange closed in 1948.
Austria and Hungarian Government Debt
The Vienna Stock Exchange was established in 1771 as a place where Austrian public debt could trade. Austrian debt was issued in Amsterdam, Vienna, London and other cities in Europe during the 1800s, and Austrian debt increased steadily between 1763 and 1913. Austria suffered inflation during the 1790s reducing the value of its banknotes to 15% of their face value. Austrian banknotes were devalued by 80%.
The Austrian National Bank (later the Austro-Hungarian National Bank) was created in 1816 and in 1817 the bank began issuing currency. Austria suffered through revolution in 1848 and 1849, suspended payments on its debt in 1849, suffered militarily during the Prussian-Austrian conflict of 1850 and the Crimean War of 1853 to 1856. Austria suffered defeat in the Austria-Prussian War in 1866, and faced rebellion from Hungary in 1867.
Figure 2. Yields on Austrian Government Bonds from 1788 to 2021
As a result of the Austro-Hungarian Compromise of 1867, Hungary began issuing its own bonds in 1868. Since Hungary had its own debt, separate from Austria’s, it was not responsible for the bonds issued by the Austrian government before World War I when the Austria-Hungary Empire was dissolved. Hungary suffered from hyperinflation between 1918 and 1924, and in 1931, Hungary defaulted on its foreign debt and remained in default until its debt was renegotiated in 1967. The 1946 hyperinflation, the worst in history, wiped out the value of all internal debt.
Figure 3. Hungarian External Bond Yields, 1872 to 1984
Hungary issued domestic currency bonds in 1997 and bond yields generally declined between 1997 and 2020, but have risen during the past two years. The yields on these bonds are illustrated in Figure 4. Hungary has generally enjoyed low inflation and a stable exchange rate leading to the declining yields on government bonds.