The Debt Consolidation of Hungarian Local Governments

Abstract

The total debt of Hungarian local governments accumulated during the 2002–2008 period was consolidated in full by the government between 2011 and 2014. Most of the debt assumed by the central budget was denominated in foreign currency, which involved high exchange risk and, therefore, financial instability for both the central and the local subsystems of public finances. According to some economists, the bailout of local governments by the state is another manifestation of the soft budget limit, showing that the Hungarian market economy is unable to break with the bad culture of centrally planned economy. The present study – buil-ding on primary research – presents the process that led to the indebtedness of local governments, as well as the theoretical and practical background of consolidation. The author believes it is unwarranted to enforce a hard budget limit for the local governments at any price.