Operating Risks and the Increasing Indebtedness of Hungarian Local Governments – Audit experiences of the State Audit Office of Hungary

Abstract

In 2011, the State Audit Office started the system-level audit of local governments. Based on risk analysis, the first round of audits covered the 19 counties, the 23 towns with county rank as well as the capital; of the 304 towns auditors checked 63 through on-the-spot checks of local governments selected through representative sampling. The financial equilibrium of Hungarian local governments obviously deteriorated between 2007 and 2010; financial risks increased and debt – particularly foreign currency debt – rose rapidly. The majority of local governments are unable to put up sufficient collateral to cover their debt service obligations. Banking exposure increased, and overdue debts rose sharply. The fact that business associations under the majority ownership of local governments also accumulated significant debts is also a serious problem. Paradoxically, the financial situation of local gov-ernments was adversely affected by the intensive investment activity related to EU tenders, as they were financed by loans, and the local governments do not have the necessary funds to cover their operating costs and to repay these loans.