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Hungary to Take Over Credit From Debt-Laden Municipalities

Oct. 27 (Bloomberg) -- Hungary’s central government will take over 612 billion forint ($2.8 billion) of local council debt to ease the burden on municipalities and avoid a breakdown in their operations.

“We have started a war on debt from the first moment of our governance” and “now the time has come for us to open a new front in this war and save our villages, towns, hamlets,” Prime Minister Viktor Orban said at a conference in Budapest today.

The government will consolidate the entire debt load of the 1,700 municipalities that have 5,000 inhabitants or less, amounting to 97.3 billion forint, Orban said. The central budget will also take over some debt from larger local councils totaling 515 billion forint, he said.

Hungary’s 3,200 local councils are struggling to repay their debt, much of which is denominated in Swiss francs, after the forint weakened and a grace period on bond principal repayments ran out in 2011. Municipalities have increasingly borrowed in foreign currencies since 2007 after the government reduced funding to cut the budget deficit, which in 2006 was the widest in the European Union at 9.3 percent of economic output.

The forint has weakened 59 percent against the Swiss franc since the middle of 2008, when the bulk of franc-denominated bonds were issued.

IMF Delays

Municipal debt stood at 1.2 trillion forint at the end of 2010, of which 47 percent was in bonds, Orban said. By the end of last year, the amount declined to 983 billion forint, of which 413 billion forint was in francs, according to data from OTP Bank Nyrt., the country’s largest lender.

The government, which has turned to the International Monetary Fund and the European Union for financial aid to reduce its financing costs, took over 180 billion forint of debt from counties last year. Talks with international lenders have been delayed several times because of Orban’s refusal to adhere to economic and legal conditions set by the IMF and the EU.

Under the debt consolidation plan announced today, the state will take over about 40 percent of the credit amassed by municipalities with 5,000 inhabitants or more, Orban said. The exact share of debt assumed will depend on the tax revenue of the individual regions, he added.

Hungary, mired in its second recession in four years, is seeking to narrow its budget deficit to below the EU’s limit of 3 percent of economic output to avoid the suspension of EU development funds. The bloc may not end its excessive deficit procedure against Hungary because it sees the shortfall breaching the limit, the daily Magyar Nemzet reported today. Still, the EU doesn’t plan to freeze development funds, according to the report, which cited people it didn’t identify.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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