Is It Necessary to Regulate Local Governments’ Borrowing?

The Lessons of the Hungarian Case

Erzsébet Gál
Assistant Professor, Research Manager, Budapest Business School, Collage of Finance and Accountancy
Published in: Public Finance Quarterly 2011/1 (p. 125-146.)

SUMMARY: The international literature specifies four models to the rule of the local governmental indebtedness. The „regulated by the market model” and the „rule based model” are able to be in force in the Hungarian local governmental crediting market considering the Hungarian legal environment. The Hungarian empirical researches obtained the result that the Hungarian market follows the „regulated by the market model” from the models of Ter – Minassian – Craig. The essence of the market regulated model—that for the players of the subnational level the raising of external funds is determined by money and capital market developments and mechanisms—examining the domestic market by itself, cannot be substantiated. The success of the market regulated model is also hindered by the fact that market participants are not perfectly informed. Based upon my empirical researches and supplementing the models found in technical literature, I have established that at the Hungarian local governmental crediting market the regulation of indebtedness can be deemed a model “based on incurring risk”. The study tries to verify this thesis.

KEYWORDS: indebtedness, bank, crediting market, local government, risk


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