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

This article explores the risks that arise as local governments become indebted. The article is based on interviews conducted with the heads of the local government business branches of the most important credit institutions in terms of local government financing, as well as related data, such as data from the Hungarian State Treasury on the financial management of local governments and data from banks. Until 2011, of the outstanding bonds issued during the boom in the local government sector in 2007–2008, payment began on only one third. By the end of the year, however, nearly 50 per cent (and by the end of 2013, 90 per cent) of total bonds outstanding will enter the principal repayment period. Due to the considerable foreign exchange exposure of total loans and bonds outstanding (60 per cent, with 80 per cent of those having Swiss franc exposure), as well as the declining revenues of local governments and 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. Our analysis establishes that local government debt-related risks have increased significantly in the recent period, but the banking sector is willing and able to manage these risks. Future comprehensive restructuring of the local government system and a change in debt settlement procedures by the Government may determine the financial position of the local government system. In parallel with a reorganisation of responsibilities, the possible transfer of a portion of local government debt (primarily from local county governments) to the central budget may result in a clearer picture.