Hungary's debt close to all time high

Hungary’s gross general government debt was 85.1% of gross domestic product at the end of the second quarter of 2014, the National Bank of Hungary (MNB) reported on Monday. According to portfolio.hu, it is mostly related to the peculiar course in Hungary’s debt financing and a correction of the end-2013 doctoring of debt figures.

Hungary’s gross general government debt was 85.1% of gross domestic product at the end of the second quarter of 2014, the National Bank of Hungary (NBH) has reported on Monday. As the financial website portfolio.hu, the ratio was this high only once in the 2000s, four years ago when senior officials of the ruling Fidesz party, Lajos Kósa and Péter Szijjártó, made remark about Hungary being on the brink of collapse, triggering a massive forint weakening. Before that, the debt-to-GDP ratio was higher than the end-Q2 reading during the shock of the change of regime, nearly 20 years ago.

According to preliminary financial accounts data published by the central bank, the most closely watched debt-to-GDP ratio rose further. It stood at 79.4% at the end of 2013, then, it crept higher to 74.4% by the end of March and further to 85.1% by end-June.

This time the weakness of the forint, the financial website says, contributed very little to the rise in the debt ratio since the euro firmed ‘only’ 1% against the Hungarian currency, likely lifting Hungary’s debt-to-GDP ratio by no more than 0.3 percentage points.

The rise in the government debt is related more strongly to the peculiar course in Hungary’s debt financing and a correction of the end-2013 doctoring of debt figures. Put it simply: the state issued a lot more forint government securities than the maturing volume. This has more than one reasons, according to portfolio.hu:

Firstly, the budget accumulates the biggest part of the annual deficit traditionally in the first half of the year, which needs to be financed.

Secondly, the self-financing model launched by the central bank shepherded foreign investors and financial institutions to buy more local government securities, and the Government Debt Management Agency (ÁKK) did not want to disappoint, so it sold more debt at auctions than it originally intended to several times.

Thirdly, the state aimed at boosting its liquid financial resources either way, as it let its liquid reserves deplete to a great extent at the end of last year so that it could squeeze the debt-to-GDP ratio below 80%. (In other words, it financed expiring debt by reducing its liquidity instead of having new issuances.) In the language of numbers: The state’s liquid reserves, i.e. this was the balance of the Treasury Account (KESZ), stood at HUF 752 bn at the end of 2013, HUF 1,787 bn at the end of March and HUF 2,262 bn at the end of June.

These impacts were strong enough to kick the debt-to-GDP ratio higher even though Hungary repaid more FX debt in Q2 than how much fresh funds it raised.

The financial website concludes that on the whole, today’s high debt-to-GDP reading is typically the case of a glass half empty or half full. On the one hand, we should take in to consideration that the ratio could be lower by year-end, so it would make no sense to complain that public debt is in a sharply ascending path in view of the H1 trend. On the other hand, it is also evident that Hungary’s public debt is far from being on a clear descending course; the ratio has been hovering in a range between 80% and 85% over the past four years.