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Banks, firms, bad debts and bankruptcy in Hungary 1991-4

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  • J. P. Bonin
  • M. E. Schaffer

Abstract

The paper examines Hungary''s experience with banking and bankruptcy reform in the period 1992-94. The first part of the paper uses enterprise-level data to show that in 1992, the same year in which the amount of classified loans in the state-owned commercial banks grew enormously, the proportion of total bank credit held by highly-unprofitable firms hardly changed. The inference from this is that the rapid growth of bad debt in 1992 was not the result of a "flow problem" (new bad lending) but rather represented the emergence of an inherited "stock problem" (pre-existing loans to inherited troubled clients). The paper then considers Hungary''s 1992 bankruptcy reform, and in particular the novel "automatic trigger" which required firms to file for bankruptcy if they had a payable of any size, owed to anybody, overdue 90 days or more. The paper argues that the bankruptcy experiment was flawed on two counts. First, one of the key motivations for introducing the automatic trigger - a perceived problem with financial discipline and with interenterprise credit in particular - was largely unfounded. Second, the automatic trigger experiment was costly because the impact on firms which were forced to file for bankruptcy led to chains of disrupted trade relations which rippled through the economy. Evidence from a 1994 survey of 200 manufacturing firms shows that a majority of the surveyed firms had been involved in bankruptcies as creditors, and had lost not only sales but also suppliers as a result. The last part of the paper looks at the Hungarian government''s bank recapitalization and enterprise bailout programs, arguing that they were poorly structured, overly bureaucratic, and susceptible to lobbying by firms looking to be "rescued". The paper concludes with a number of lessons: don''t "shake things up" without being sure of the possible consequences; don''t overestimate the capacities of bureaucratic procedures and undeveloped asset markets when designing debt workout programs; and don''t underestimate the ability of market agents (banks and firms) to enforce financial discipline on each other if incentives are properly structured.

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File URL: http://eprints.lse.ac.uk/20764/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 20764.

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Date of creation: Apr 1995
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Handle: RePEc:ehl:lserod:20764

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References

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  1. Kornai, Janos, 1993. "The Evolution of Financial Discipline under the Postsocialist System," Kyklos, Wiley Blackwell, vol. 46(3), pages 315-36.
  2. Baer, Herbert L. & Gray, Cheryl W., 1995. "Debt as a control device in transitional economies : the experiences of Hungary and Poland," Policy Research Working Paper Series 1480, The World Bank.
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Cited by:
  1. Shumei Gao & Mark E Schaffer, 1998. "Financial Discipline in the Enterprise Sector in Transition Countries: How Does China Compare?," CERT Discussion Papers 9801, Centre for Economic Reform and Transformation, Heriot Watt University.
  2. Debora Revoltella & Peter R. Haiss & Gerhard Fink, 1998. "Corporate Governance in Central and Eastern Europe - Transition management is a tough job," SUERF Studies, SUERF - The European Money and Finance Forum, number 3 edited by Morten Balling.
  3. Akhmed Akhmedov & Ekaterina Zhuravskaya, 2003. "Opportunistic Political Cycles: Test in a Young Democracy Setting," Working Papers w0024, Center for Economic and Financial Research (CEFIR).
  4. Debora Revoltella, 1998. "Financing Firms in East European Countries: an assymetric information and agency costs approach," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  5. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  6. Josef C. Brada & Ali M. Kutan, 2002. "The End of Moderate Inflation in Three Transition Economies?," William Davidson Institute Working Papers Series 433, William Davidson Institute at the University of Michigan.
  7. Peter R Haiss & Gerhard Fink, 1998. "Seven Years of Financial Market Reform in Central Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  8. Brauer, Holger & Falk, Martin & Raiser, Martin, 1996. "Labour markets in Poland and Hungary five years from the start of transition: Evidence from monthly data," Kiel Working Papers 742, Kiel Institute for the World Economy.
  9. Baer, Herbert L. & Gray, Cheryl W., 1995. "Debt as a control device in transitional economies : the experiences of Hungary and Poland," Policy Research Working Paper Series 1480, The World Bank.
  10. Buch, Claudia M., 1995. "The emerging financial systems of the Eastern European economics: A progress report," Kiel Working Papers 716, Kiel Institute for the World Economy.
  11. J. Gacs, 2000. "Macroeconomic Developments in Hungary and the Accession Process," Working Papers ir00013, International Institute for Applied Systems Analysis.

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