Risks of the indebtedness of the Hungarian local government sector from a financial stability point of view

Our paper explores the risks that arise due to indebtedness of Hungarian local governments. Our analysis relies on interviews conducted with the heads of the local government business branches of the credit institutions most important in terms of local government financing and on the related data collections, as well as on data from the Hungarian State Treasury regarding the financial management of local governments and on data from banks. Until 2011, the repayment of the bonds issued during the bond issue boom experienced in the local government sector in 2007–2008 started only in the case of one third of the bonds outstanding. However, by the end of 2011 year nearly 50 per cent and by end-2013 90 per cent of total bonds outstanding will reach the principal repayment period. Due to the considerable foreign exchange exposure of total loans and bonds outstanding (60 per cent, 80 per cent of which is Swiss franc exposure) as well as to the declining revenues of local governments and the deteriorating economic prospects, it is doubtful that local governments will be able to repay their debts to the banking sector in line with the original maturities. Therefore local governments financing may have an effect not only on the fiscal position but on the whole financial system as well. Nevertheless, our partial analysis establishes that the risks related to the debt of the local government sector have increased significantly in the recent period, but these risks could be managed by the banks. The comprehensive restructuring of the local government system as a whole and a further changing of debt settlement procedures by the government may influence the financial position of the local government system. In parallel with the regrouping of tasks, transferring of a portion of local government debt (primarily from the county local governments) to the central budget may result in a clear picture.