Banks start to sweat on Hungary's municipal debt plan

By bne IntelliNews October 30, 2012

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The Hungarian government is set to discuss the details of its plan to consolidate HUF612bn (€2.15bn) in municipal debt on November 7, as worries of another hit on the country's banks rise.

Prime Minister Viktor Orban announced the plan to partially consolidate local authority debt on October 27. As well as taking on the debt, the central government will exercise greater control over local authority spending, and aims to limit the growth of credit.

The PM also said that the government will create a closed financing system limiting the authority of cities and towns to those responsibilities for which they have adequate financial resources. Local governments will also need prior permission before taking out new loans. However, he failed to offer full details. Local media reported on October 29 that the government will discuss the plan next week.

While on the one hand the plan could offer the banks a more reliable debtor - in the form of the central government - as well as limiting the chances of local authorities overextending themselves, the worry for the banks is Budapest's plans for the chunk of current debt it has taken on board.

Already bitten several times by Orban via the highest banking tax in the EU, a new financial transactions tax and last year's forex mortgage repayment scheme, Hungary's banks will be extremely wary of the PM's suggestion on announcing the plan for municipal debt that, "those who think ahead will have a bad hunch or two". The bank-bashing PM also remarked that the decision to consolidate the debt "will not sit well with those whose interests have hitherto lain with collecting usurious rates from local governments," reports portfolio.hu.

"As lenders to the municipal sector, the banks have most certainly paid attention to this side remark by the Prime Minister," the website's analysts suggest. "Orban's comment raises the question as to what extent the central government... will seek to take advantage of its stronger negotiating position; that is, whether banks should be expecting new financial burdens."

Analysts at Equilor also suggest that, on second thoughts, the plan may not be such good news for the banks. "OTP held about HUF300bn in municipal debt, which is less than 25% of the total in Hungary," they note. "Yesterday investors applauded the decision, but we have the feeling the more comfortable negotiating position of the government could even lead to haircuts and/or maturity extensions of municipal debt, therefore it is an additional risk for OTP."

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