Economy
Credit rating agency warns Hungary of default risk over municipal debt consolidation
If the government forced banks arbitrarily to suffer losses on the assumption of municipal debt by the state, it would legally classify as bankruptcy, i.e. it would be a selective sovereign default, origo cited several sources as saying unofficially that this is what one of the biggest credit rating agencies warned the government about.
The reason is simple: the state announces arbitrarily that it will not repay part of its debt. (The government spokesman’s office gave an evasive answer to the portal whether the cabinet received such warning or not.)
The warning comes not long after Prime Minister Viktor Orbán announced that the state will consolidate HUF 612 bn worth of debt from 1,956 municipalities. He also said banks, which he referred to as the collectors of rake-offs, may not be happy about the way these debts will be settled. The PM did not elaborate what will happen to the assumed debts, but said "those who think ahead will have a bad hunch or two" and not all of these are unjustified.
Portfolio.hu learned that experts of two large rating agencies (Moody’s and Standard & Poor’s) have recently paid a visit to Budapest. According to origo.hu, they have flagged their concerns about the aforementioned negative scenario during these talks. The portal also noted that at a background talk between journalists and Fidesz staff they said the cabinet was mulling a 10-15% discount on the assumed debt.
Local daily Népszabadság reported today that the government is trying to portray municipal debts as risky for the banks and so it plans to ask a 20-25% discount from them in the consolidation of a HUF 612 bn debt stock. Portfolio.hu estimates that a 20-25% “haircut" would cause the banks HUF 122-153 bn worth of losses, should all of the HUF 612 bn debt affects the banks’ outstanding claims.While a partial writedown of debts would free some of the provisions too, origo.hu learned from banking sources that the banks would be better off only if the discount is not larger than 10%. If their losses are bigger than that they would lose more on this side than they would win on the other.
A potential technical sovereign default would be detrimental not only for the state but for the entire banking system from a financing respect. The government wants to avoid that at all cost, so the Economy Ministry and the Government Debt Management Agency (ÁKK) are working full force to resolve this issue, origo.hu said. The portal believes the cabinet will settle the issue via negotiations, and will try to convince the banks to lower the interest rates instead of not paying part of the principal.
The reason is simple: the state announces arbitrarily that it will not repay part of its debt. (The government spokesman’s office gave an evasive answer to the portal whether the cabinet received such warning or not.)
The warning comes not long after Prime Minister Viktor Orbán announced that the state will consolidate HUF 612 bn worth of debt from 1,956 municipalities. He also said banks, which he referred to as the collectors of rake-offs, may not be happy about the way these debts will be settled. The PM did not elaborate what will happen to the assumed debts, but said "those who think ahead will have a bad hunch or two" and not all of these are unjustified.
Portfolio.hu learned that experts of two large rating agencies (Moody’s and Standard & Poor’s) have recently paid a visit to Budapest. According to origo.hu, they have flagged their concerns about the aforementioned negative scenario during these talks. The portal also noted that at a background talk between journalists and Fidesz staff they said the cabinet was mulling a 10-15% discount on the assumed debt.
Local daily Népszabadság reported today that the government is trying to portray municipal debts as risky for the banks and so it plans to ask a 20-25% discount from them in the consolidation of a HUF 612 bn debt stock. Portfolio.hu estimates that a 20-25% “haircut" would cause the banks HUF 122-153 bn worth of losses, should all of the HUF 612 bn debt affects the banks’ outstanding claims.While a partial writedown of debts would free some of the provisions too, origo.hu learned from banking sources that the banks would be better off only if the discount is not larger than 10%. If their losses are bigger than that they would lose more on this side than they would win on the other.
A potential technical sovereign default would be detrimental not only for the state but for the entire banking system from a financing respect. The government wants to avoid that at all cost, so the Economy Ministry and the Government Debt Management Agency (ÁKK) are working full force to resolve this issue, origo.hu said. The portal believes the cabinet will settle the issue via negotiations, and will try to convince the banks to lower the interest rates instead of not paying part of the principal.
