Only in Hungary: experiences with municipal debt adjustment and suggested regulatory changes

Abstract

Reforming Hungary's government sector seems to be an unavoidable task. A competitive economy does not exist without modern public finances. (Kovács, 2006). The State Audit Office outlined a possible path to reform in 2007. Local government (or municipal) reforms play important roles in these theses. Increased financial discipline is part of these reforms. Municipal reform proposals to date did not pay much heed to the legal institution of municipal debt adjustment. We will attempt to generalize our observations of municipal debt adjustment in Hungary, and attempt to show how slight modifications to the law may result in stricter financial discipline in the local government sector. Hungary is the only European state – perhaps with the exception of cantonal legislation in Switzerland – that has a municipal debt adjustment process in its statutes that is supervised by a court-appointed independent bankruptcy trustee. In Slovakia, Latvia, Romania, the Russian Federation or Estonia, the Treasury or Finance Ministry, or a state institution, intervenes directly into the affairs of an insolvent municipality.