Government taking over municipalities’ debt

The leading leftist daily says a partial government bail-out was inevitable but the banks that funded Hungarian local governments are unlikely to recover all their money.

Prime Minister Viktor Orbán announced on Saturday October 26 that the government would take care of half of the municipalities’ debt, totalling over 4 per cent of GDP. Smaller municipalities will get rid of all their debt, while the bigger ones will be partially bailed out, depending on the level of their tax revenues. As part of an effort aimed at reducing the public deficit, the Fidesz-led government is also taking over cultural institutions, schools and medical facilities from local councils.

Reporting on the reactions of mayors to the announcement, Népszabadság acknowledges that the government had to intervene, yet the plan has the moral hazard that it will reward spendthrift municipalities. In its front page editorial the left wing daily explains that to let the majority of local councils default on their debts would be tantamount to political suicide, especially with the planned cuts in municipal revenues. The plan also follows the logic of centralization, characteristic of the Fidesz administration. Yet there is a second actor in the play – banks will receive, speculates the editorial, an “irresistible offer” of getting some of their money back and writing off the rest. And as far as creditors are concerned, that may well be the lesser evil.

Tags: banks, debt, municipalities, Orbán