The spread on Hungary’s credit default swaps rose to a six month-high of over 335bp this week. Some of the rise is attributable to general global market turmoil, but local government debt woes are also partly to blame.
I first discussed the country’s shaky local government finances in a post back in early June. See Local Government Woes: Next Leg of the Crisis. The problem is that municipalities have borrowed extensively in Swiss francs (around 60% of total borrowing as of end-2010), and the franc has strengthened by almost 14% against the forint since June 1. As a result, local governments are pleading for help.
Hungarian local governments have asked Prime Minister Viktor Orban to help some of them win a one-year moratorium on principal repayments for over $3 billion worth of Swiss franc loans, a move that analysts said could amount to restructuring.
The local government debt problem is not an isolated one. Banks are exposed as well. According to the latest Financial Stability Report, their exposure to municipalities exceeded HUF 1,000 bn (US$5.2bn/€3.7bn), accounting for 5% of total bank loans at the end of 2010. The FT’s Beyond Brics blog also has a post on the topic and it notes that a couple of banks are far more involved than others without naming names. Any thoughts on who these might be? Perhaps OTP?
See related Hungary posts: