IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Banks, Firms, Bad Debts and Bankruptcy in Hungary 1991-4

Listed author(s):
  • J Bonin
  • M Schaffer

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0234.

in new window

Date of creation: Apr 1995
Handle: RePEc:cep:cepdps:dp0234
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. 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.
  2. Kornai, Janos, 1993. "The Evolution of Financial Discipline under the Postsocialist System," Kyklos, Wiley Blackwell, vol. 46(3), pages 315-336.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp0234. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.