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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 Metropolitan Research Institute 2 Local Government Investment Metropolitan Research Institute 3 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 Metropolitan Research Institute 4 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 Metropolitan Research Institute 5 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 Metropolitan Research Institute 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 Metropolitan Research Institute 7 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 Metropolitan Research Institute 8 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 Metropolitan Research Institute 9 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 Metropolitan Research Institute 10 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) Metropolitan Research Institute 11 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 Metropolitan Research Institute 12 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 Metropolitan Research Institute 13 Source: K. Jokay IGE Ltd Metropolitan Research Institute 14 Local Government Debt Services Metropolitan Research Institute 15 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 Metropolitan Research Institute 16 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 Metropolitan Research Institute 17 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, Metropolitan Research Institute 18 Concentration of the market – demand side Small LGs has no access to the market Medium LGs awareness Large LGs on the focus of banks Metropolitan Research Institute 19 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 Metropolitan Research Institute 20 „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 Metropolitan Research Institute 21 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 Metropolitan Research Institute 22 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 Metropolitan Research Institute 23 Thank you for your attention! Metropolitan Research Institute 24