Debt Repayment Capacity Of Local Government Sector In Poland During The 2008-2013 Economic Slowdown Period

The crisis, which began in 2008, had a negative impact on the financial condition of local governments across the European Union. In Poland, the debt of the local government sector increased from 2.3% of GDP in 2008 to 4.2% of GDP in 2013. The growing indebtedness influenced the scope of countercyclical policies of local governments. At present, such policies appear as hardly sustainable in the context of future debt repayments and the required deleveraging process. The paper shows simulations concerning the ability of local governments to service their accumulated debt. In a moderately optimistic scenario when there is no new borrowing, over 25% of local governments will need more than 15 years to repay their existing debts. Although in 2013 the financial indicators showed sufficient space for debt servicing for 95% of local governments, the sector remains highly vulnerable to future adverse scenarios. The use of random sampling computational algorithms (Monte Carlo method) applied to the local government financial ratios based on free operating cash flow and net debt confirms the sector’s negative credit risk exposure. Even modestly adverse scenarios show that ca. 20 percent of local governments will reach alarmingly low levels of their debt service indicators in the near future. The larger municipalities appear to be the local government subcategory with the highest credit risk exposure.