Indebtedness of Hungarian towns and counties

A couple of days ago a colorful chart overlaid on the map of Hungary appeared on Népszava's front page. It showed the amount of money towns and counties, almost all of them in Fidesz hands, received as a result of issuing municipal bonds in the last few years. When we talk about Hungary's indebtedness we mostly think of the budget deficit and the amount the central government borrowed. We don't often consider the indebtedness of local governments which is, believe me, no chump change. It seems that the local councils, both of cities and counties, are issuing bonds or borrowing money in an irresponsible manner because they pretty well know that a city or a county cannot go bankrupt. Surely, they reason, the central government will come to the rescue if they get to the brink of bankruptcy.

Bonds are normally issued for specific (usually construction) projects, but it seems that some of the towns have been using this money to cover operating expenses. Moreover, according to the Állami Számvevőszék (Government Accounting Office) the towns of Székesfehérvár, Gödöllő, and Újfehértó borrowed a substantial amount of money with the understanding that the money would be paid back in one lump sum (principal plus interest) only at the end of twenty years. Such an arrangement according to the experts is more than risky. If these towns have trouble covering their everyday operational expenses, how will they ever be able to pay back a large amount of money in one lump sum?

About one quarter of the local governments (municipal and county) took out bank loans in foreign currencies and with the fluctuation in the exchange rate they took quite a beating this past summer. And who knows what the future will bring? Three-quarters of the municipal bonds were also issued in foreign currencies which is an additional risk factor for the towns. According to the Accounting Office 19% of the money received from issuing municipal bonds was used to pay back earlier debts and 10% for operating expenses. The city fathers used the lion's share of the money (71%) to accumulate cash. They deposited this money in the bank at a very low interest rate. Their rationale was that they might need the cash if they have to contribute to projects that will be in the main financed by European Union monies.

The local governments also receive substantial sums yearly from the central government. Often they use the money beside operating costs for not income-generating projects. A new swimming pool or an addition to the local school is welcomed by the population and may "buy" votes at the next election, but the local inhabitants don't realize that these projects will be a continuing drain on the municipal budget. The swimming pool and the building have to be maintained, and they're not bringing in any income.

Although the municipalities are crying poor at the moment, they have actually increased their wealth between 2005 and 2008 by 12.6%. They accomplished this, according to the Accounting Office, by practicing irresponsible fiscal management which will most likely have very serious consequences. What really blew the minds of the financial experts at the Office was the discovery that about 80% of the municipalities didn't start their fiscal years with a balanced budget plan. The budget even on paper had a built-in deficit. They hoped to close the gap by borrowing more or, in some cases, by using EU money.

So it's no wonder that the 4.5% decrease in the amount of money municipalities would receive in the 2010 budget caused total panic among the mayors. Lajos Kósa, mayor of Debrecen, is organizing a demonstration in front of the parliament building for October 10 to protest the proposed cuts. Today István Nyakó, the spokesman for MSZP, asked him to call it off fearing yet another gathering of extremists that would make a very bad impression in international financial circles. I doubt highly that Kósa will oblige. If one can believe the Fidesz mayors imminent bankruptcy is awaiting their cities: public transportation will cease to function, poor children will go home hungry, schools will have to be closed, hospitals will not be able to service their patients.

Yet I hear that the new Fidesz mayor of Pécs, Zsolt Páva, is planning to spend 350 million forints to buy a collection of Zsolnay porcelain from an American-Hungarian collector. The same mayor is spending another 300 million on completely refurbishing the famous Széchenyi tér.Pecs-szechenyi_ter My cousin who lives not far from there simply cannot get over the total waste. Above you can see the square as it has been for time immemorial. Or at least since my childhood. The only difference occurred in the 1950s when the decision was made to stick the statue of János Hunyadi in the right lower corner of the square. I remember the huge upheaval. Most people didn't see any reason to have his statue there. Although he may have been an important political figure in Hungarian history, he had no connection with Pécs whatsoever. As far as I'm concerned the square was fine as it was and changing it is unnecessary, especially in a time of budgetary cuts. It just costs money and brings in nothing. I managed to find a model of the square.Pecs-szechenyi-ter-latvanyterv-1 Well, I don't know whether it is worth 300 million. I do hope that Zsolt Páva will not be among the Fidesz mayors demonstrating in front of Parliament. Just yesterday Gordon Bajnai mentioned that no European convergence money will go to municipalities to put a new fountain on the main square before the government receives some plan about the elimination of Gypsy ghettos! One thing is sure: Hungarian mayors are enamored with the main squares of their towns. One of Lajos Kósa's first acts was to completely redo the square in front of the Hungarian Reformed Church (Nagytemplom)! Apparently, the citizens of Debrecen were not too pleased. They don't like change. Neither do the people of Pécs. My cousin complains about the daily upheaval on Széchenyi tér and even sent me a xerox of an article written by a professor emeritus of the local university. The professor is very unhappy and loudly complains about the state of the crumbling Hotel Nádor whose facade is nothing but a Potemkin wall! He mentions the empty storefronts nearby while millions are spent on slightly changing the look of the square. My cousin is wondering on whose property the lovely white stones that surrounded the square will end up. On the "brighter" side, while digging they discovered the cellar of a house owned by Dracula! Unfortunately there is no money to do anything with it. It will be covered up and buried under the fancy stonework. Although in my opinion that might have brought some tourism money to the town. Just think how they could have advertised all the murders committed in that cellar! Whether true or not is another matter.

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Odin's lost eye
Guest
I am surprised that the situation is not even worse. The Hungarians proclivity to live on other people’s money and the profligate way in which local authorities, both here and in the U.K., spend their citizen’s hard earned cash is truly amazing. Towns and cities think that they will never go bankrupt because Government will bail them out. Towns have gone bankrupt in the past and not been bailed out. The result was actually very beneficial for the town because the receivers set them up on a sound financial footing by selling off all the town’s assets to the highest bidder. This got rid of a large amount of luxurious offices in the best parts of town and forced the officers of the town (or what was left of them) into “portacabins” etc. What I see here is only a little short of the loony ideas they spend it on in the U.K. In my ‘burg’ they threw out all the rent paying little work shops from an old school building and made it into a ‘Lesbian centre’, OK but why spend some 95000 Euros on it to fit new ‘Gentleman’s toilets’? The place was for lesbians only! Here we… Read more »
Eva S. Balogh
Guest

Odin: “I am surprised that the situation is not even worse.”
Here the topic is indebtedness of municipalities. This morning I read that Pécs’s indebtess is 40 billion forints. Its yearly budget is 50 billion. The latest is that the new mayor is in the middle of getting rid of a French concern that owns 48% of the shares in the company that supplies water to the city. Security men prevented the current managers from entering the building. The city is planning to break the contract. That will cost a pretty penny too. As a friend of mine said this morning from the happenings at Pécs one can have a good idea what Fidesz rule will be like.

Erik the Reader
Guest

Ha, ha ha …You are concerned with what will happen under FIDESZ but you were not concerned at all with what happened under the Zuschlag type MSZP SZDSZ government of thieves. I tell you what should come: a day of reckoning and retribution!

Odin's lost eye
Guest
It is worse than I imagined. I thought at first that here we had the usual ‘Civic Lunacy’ caused by people who did not understand the first thing about finance. If as you say “Pécs’s indebtedness is 40 billion forints. Its yearly budget is 50 billion” -80% of its annual income how the ???? will they ever pay it off ? In the U.K. the ‘District Auditor’ would have blown the whistle long ago. You also say that “the new mayor is in the middle of getting rid of a French concern that owns 48% of the shares in the company that supplies water to the city. Security men prevented the current managers from entering the building. The city is planning to break the contract.” You also say “this will cost a “pretty penny”. I should have thought that after the ‘slapping’ the Hungarian Government got at the hands of the European Court when Fidesz last attempted to revoke contracts they would have learned not to do that again. A pretty penny will only just cover the compensation. Let alone the punitive damages –for doing the same thing again-. All Hungarians must learn that they must abide by the rules… Read more »
Erik the Reader
Guest

@Odin’s lost eye you forget the debt caused by socialist who are the heirs of Kádár’s regime. They brought the country to bankruptcy and now even their followers can see their real face: a bunch of greedy people bent on getting rich on public money who are TRAITORS selling out the country’s interests. MSZP and SZDSZ care only about the benefit of their clientele.
Remember the position of Hungary in the times of Orbán and what we are now!

Eva S. Balogh
Guest

Considering that Erik a reader he sure writes a lot!

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