External Financing of Hungarian Local Governments: Knowledge and Attitude

The drastic increase in volume of local government debt in Hungary started in 2006. From that year to 2009 the value of municipal bonds issued increased sevenfold and exceeded USD 1 billion. My hypothesis assumes that a supposable improvement in local municipal financial management may have resulted in the spread of bond issue, which in Hungary is still considered innovative. My research, which was based on a stratified sample of 308 Hungarian municipalities, came to the conclusion that expertise of local governments’ financial executives related to loan financing (including also bond financing) is extremely low. As an interval estimation, we can conclude that practically 31–39% of all the Hungarian municipalities have no professional knowledge in this field. Based on my survey, the least right answers were given to statements relating to bond financing itself, though most respondents knew that long term borrowing’s priority is investment. The majority of local governments are unable to distinguish the economic differences between bank loans and bonds, and are unclear concerning the potential benefits, advantages, and disadvantages of bonds. No wonder that nearly all the bonds were issued privately where the buyers were solely commercial banks. In addition, 12–18% of the municipalities has prejudices and clearly has misconceptions about obtaining funds through borrowing. According to the results of principal component analysis local governments’ knowledge level can be classified and explained by three components: theoretical knowledge of local borrowing, knowledge of legal and administrative regulation, and skill in capital market financing. By summing up the results of the research it can be stated that the improvement in local financial management couldn’t have been the primary reason for municipal bond boom, but there were external factors that determined and dominated this process of booming