1 / 23

Municipal Borrowing – B onds or Bank Loans. Recent Experiences from Hungary

Municipal Borrowing – B onds or Bank Loans. Recent Experiences from Hungary. Charles Jókay, Ph.D. Visiting Professor of Public Policy, CEU, and Executive Director, IGE Consulting Limited, Budapest. Elsewhere in Europe….

ianna
Télécharger la présentation

Municipal Borrowing – B onds or Bank Loans. Recent Experiences from Hungary

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Municipal Borrowing – Bonds or Bank Loans. Recent Experiences from Hungary Charles Jókay, Ph.D. Visiting Professor of Public Policy, CEU, and Executive Director, IGE Consulting Limited, Budapest

  2. Elsewhere in Europe…. Most OECD and Council of Europe member states allow municipalities and other sub-national levels (provinces, counties etc.) to borrow for capital investment purposes Some allow borrowing for liquidity purposes, but these loans have to be paid back by the end of a budget year The definition of a legitimate „capital investment” varies by country. Some are strict in connecting „organic tasks” to investment, others give a free hand to municipal and other sub-national levels to „invest” as they see fit

  3. DEBT CONTROL MECHANISMS USED ELSEWHERE IN EUROPE The Policy Tools: • Restrictions on volume of borrowing and/or debt service ratios • Restrictions on municipal guarantees • Restrictions on collateral • Restrictions on the legal sources of repayment • Restrictions on the purposes for which borrowing is allowed • Administrative/review approval by higher levels • Individual borrowing ceilings/purposes determined by higher levels • Legitimate lending sources, currencies can also be regulated

  4. Securities Law (2001) Law on Financial Institutions (2006) Finance Ministry Decree on Bonds (under review) Hungarian Financial Supervisory Authority regulations (public offerings only) Law on Local Self-Government (1990) Law on State Budget System Other laws re. Accounting, records etc. Regulation of municipal borrowing in Hungary

  5. “Buy side” regulations • Budapest Stock Exchange listing standards • Basel II • Prudency regulations regarding mandatory and voluntary private pension funds, insurance companies, investment funds and other investment vehicles • EU accession, cross-border finance, representation offices

  6. Combined Debt Service and Source of Repayment Formula: Example of Hungary • Municipalilties may borrow for any capital investment purpose approved by the Local Council (no MOF involvement) • No restriction on currency or type of bank • Only property categorized as „non-essential” for performing public services may be used as collateral (the City Hall, school, main square, museum etc., are „protected” and may not be mortgaged) • Only 70% of „non budget revenue” (called own-source revenue in Hu) may be used in any given year to cover debt service. • Debt is defined as: bank loans, vendor loans, leasing, bond issues, guarantees, promissory notes and other long term commitments of public funds such as PPP arrangements

  7. Long-term municipal debt in Hungary: 2003-2006

  8. Factors that lead to doubling of long-term municipal borrowing 2003-2006… • financing of cost-sharing of EU-funded projects • pre-financing EU and national source projects • municipal assets available for sale “ran out” • national funding sources reduced • EU environmental, energy efficiency etc. standards • Refinancing of short-term debt to fund operational • expenses (illegal but popular)

  9. Municipal Balance Sheet (total assets/liabilities) 2003-2006

  10. Municipal financial assets vs. Total debt (long term, short term, bank loans and bonds issued) quarterly 2000 -2006 (thousand million HUF)

  11. Bank Loans made..stock figures, Financial Supervision data (2006-2007)

  12. Minimal Exposure of Banking Sector....

  13. The shift towards bonds began in 2005 and continues

  14. longer maturities (15-20 years) longer grace periods (5 years!) “callable” bonds (at no cost) debt refinancing (active debt management) exemption from public procurement (EU Directive) debt limit measurement difficult to use in cash-based accounting and budgeting system bonds in bank portfolios are liquid, do not have reserve requirements What caused the shift towards bonds?

  15. Hindrances to public issues of bonds • relatively small deal size • banks (group members) buy entire issues and do not want to “securitize” their well-performing portfolios • expense of disclosure, registration, advertising, market-making,stock market listing • privately-placed bonds are essentially substitutes for bank loans • Bank lending dominates corporate finance, few listed issues

  16. Who are the key players? Universal Banking services (accounts management) and lending dominated by: OTP Bank and Raiffeisen Bank Second tier: Erste, CIB (Intesa Gruppo), K & H (KBC Bank), Commerzbank, savings cooperatives, UniCredit Rumors of Raiffeisen-Erste merger in Austria?

  17. More key players… • Boutique players: NÖ Hypobank (cross-border), Dexia Kommunalkredit (portfolio, syndication) • Not active in municipal account management or lending: MKB (Bayerische Landesbank), Budapest Bank (GE Moneybank), Citibank, Dresdner, Calyon, Oberbank, Sopron Bank, Deutsche Bank, Allianz Bank, BNP Paribas, ING Bank, Volksbank, WestLB etc.

  18. Risks: Creditworthiness, default and debt adjustment • very low default rate on municipal loans (few loans in higher risk category) • Businesses are not „tough” on municipal clients • Basel II treats municipal debt and debt of municipal companies favorably (statistics will soon show exposure to corporatized municipal companies) • -Act on Municipal Debt Adjustment (1996) • PUCs („JKP”) were corporatized in 1991 and appear as commercial loans, i.e. are hidden

  19. Lessons learned… • Municipalities are considered low risk despite slow and inaccurate information flow • Foreign currency lending now close to 40% • Competition is intense for accounts management and lending services • Lending has started to shift to private bond issues for reasons unrelated to cost • Accounts management and collateralized lending now not prerequisites (information monopoly) • Public procurement law distorts market

  20. More... • Secondary regulations are critical • Banks prefer to retain municipal portfolios • Bond market developed 10 years after regulatory framework was in place • Non-bank financial institutions tend to ignore municipal lending market and do not buy municipal securities for their portfolios • If bonds are issued in great numbers for the wrong reason, regulators will overreact

  21. Information Sources • National Bank of Hungary statistics: http://english.mnb.hu • Hungarian Financial Markets Supervision: http://english.pszaf.hu • Municipal bankruptcy case studies: www.igeconsulting.com • EU Directives: 92/50/EEC listed financial services in Annex 1A; 2004/18/EC exempted bond issues and other securities from public procurement. Banking services, such as loans, are not exempt. http://ec.europa.eu/internal_market/publicprocurement/legislation_en.htmstandard

  22. Thank you for your attention! Charles Jókay jokay@igeconsulting.com

More Related