Transcript Structural adjustment

The Hungarian Law on Bankruptcy
Gábor Balás
Metropolitan Research Institute
Conference on Debt Finance of Investment
Programs, Moscow
8 June, 2004
Short introduction to the
Hungarian LG system
Since 1990
 Two-tier government system
 3200 municipalities
 Wide range of local responsibilities
 Changing financial regulation
 Demand for local investment
 Property transfer to LGs

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Local Government Investment
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Sources of municipal capital
investments, 1994-2001
80%
70%
60%
50%
Loans
40%
Revenue from property
30%
20%
10%
0%
1994 1995 1996 1997 1998 1999 2000 2001
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Trends at municipal borrowing
Loans in nominal value
Loan (in costant HUF of 1991)
Loans as a % of total expenditures
50
45
40
35
30
25
20
15
10
5
000
000
000
000
000
000
000
000
000
000
0
7,0%
6,0%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
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Composition of LG loans
200,0
Loans from abroad
150,0
Loans from other
state fund
100,0
Loans from monetary
institutions
50,0
Bonds at foreign
investors
0,0
1998 1999 2000 2001 2002
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Bonds at domestic
investors
6
Evolution of the regulation
Increasing role of Municipal credit and
warning on municipal bankruptcies 1994
 Regulations

– loan ceiling -- 1995 Budget Year
– central treasury -- January 1996
– bankruptcy law -- April 1996
– auditing -- 1997
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Municipal Bankruptcy Law, 1996
Stop the accumulation of the debts
 To make incentive for stable financial
management (stop moral hazard
behaviour)
 Provide clear and transparent
procedure in the case of indebtedness
 Maintain the minimum level of services
for the inhabitants

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Procedure is started (petition) by the
creditor or by local government if
.....
LG has not paid its debt within 60 days
its due date,
 LG did not pay according its obligation
to the court resolution
 LG has not paid the public debt with 60
days of due date
Sent the Files (Documents) to Court

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Court start the procedure
Appoint the Trustee who will manage
(administer) the bankruptcy procedure
 Publish in the Company Gazette and in
daily journals the start of the procedure
 Notice the creditors
 Start the negotiation

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Debt Settlement Committee:
agreement phase

Elected by the council headed by the Trustee
 „Crisis” budget – approved by the council
– Limited autonomy (role of the Trustee)
– within 60 days has to be approved (if not
liquidation procedure)
– Minimum services : 26 „task” defined

Debt settlement proposal (within150 days)
 Debt settlement agreement (within 180 days)
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Liquidation by the Court
Role of the Trustee is changed
 Crisis budget (approved or not)
 Defining the property to liquidate

– Housing special case
– „marketable” assets
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Debt adjustment – facts in
Hungary
– 19 municipalities have declared themselves
to be “bankrupt” since the law came into force
– 17 cases have been settled 1996-2003, two
are still in court as of July, 2003
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Source: K. Jokay IGE Ltd
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Local Government Debt Services
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Main characteristics of the
municipal borrowing in Hungary
Low level of debt financing at LGs
 Cyclical behaviour before local elections
 Concentration of the market

– Demand side
– Supply side
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Low level of borrowing







Alternative sources (property sales and
grants)
Lack of own sources
Unpredictability of fiscal regulations
Increased market discipline (bankruptcy law)
negative attitude toward borrowing
high interest rates
lack of experience
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Concentration of the market –
supply side (OTP)





Inherited concentration in account-keeping
lack of experience, lead to the selection of
account-keeping
Account-keeping bank can monitor easier LG
The cheapest sources (huge portfolio of
household deposits)
Newcomers concentrates on the largest
municipality,
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Concentration of the market –
demand side

Small LGs has no access to the market
 Medium LGs awareness
 Large LGs on the focus of banks
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Small LGs has no access to the
market

Lack of significant own sources (high
horizontal inequality)
 Unpredictability of future fiscal conditions
 Less experience with borrowing (lack of
human capacity)
 Not a profitable market for banks, small credit
and high risk
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„Concerns” related borrowing
– Awareness of borrowing, because of
unpredictability of future fiscal conditions
– Early selling of properties (lack of collaterals)
– Central programs determine borrowing (crowdingout, matching grants need own sources,
preferential loan is popular)
– Vulnerable local economy (one firm economy) –
volatile local tax revenue
– High risk premium
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Future policy issues





Increase and stabilize local tax capacity
Stabilization of fiscal regulation is essential
Municipal Bank or Fund should help small
local governments to borrow
Human capacity need training programs
Improve secondary municipal bond market
– Rating institution
– Tax exemption
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Lessons learned





Bankruptcy regulation can replace central
control
Predictability of fiscal regulation is a key
element
Market discipline segmented the market
Fragmentation of local government system
need central measures to make loans
available for smaller local governments
Off-budget activities (semi-public sector) play
an important role in borrowing market
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Thank you for your
attention!
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