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Document Type

Case Study

Abstract

After spinning off the commercial banking functions that the central bank had performed for many years into three new banks, post-Communist Hungary faced a severe recession in 1992. The recession led to a high level of nonperforming loans (NPLs) in the banking system. In 1992, the Hungarian government announced a Loan Consolidation Program (LCP) to remove bad debt from the balance sheets of banks on a voluntary basis. Depending on the date when a loan was classified as “bad,” the government paid 50%, 80%, or 100% of book value. In 1992, banks transferred bad debt with a book value of HUF 102.5 billion ($1.3 billion) in exchange for HUF 83 billion in special credit consolidation bonds. They transferred an additional HUF 17.3 billion in bad debt at face value in 1993. Even after these transfers, banks still held large portfolios of nonperforming loans to state-owned enterprises. In 1993, the government announced a second, “firm-oriented” LCP to acquire the bad debts of specific state-owned enterprises from banks. Acquisitions under this program totaled HUF 61.3 billion. Rather than create a centralized asset management company (AMC) to manage the two loan consolidation programs, the government used existing state-owned agencies. A portion of the debt purchased under the bank-oriented LCP was sold to a state-owned agency for resolution and disposal; for the firm-oriented LCP, two government agencies were responsible for the management and disposal of acquired bad debt. The government entered into temporary arrangements with the selling banks to continue to manage nonperforming loans until they could be sold. The LCPs temporarily improved bank balance sheets, but high levels of nonperforming loans continued to weigh on bank balance sheets because of the voluntary nature of the LCPs and continued economic deterioration. The government followed the LCPs with a recapitalization program in 1993 and 1994.

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