Bad news about the government debt ratio

HUNGARY - In Brief 18 Aug 2014 by Istvan Racz

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Fact: The government debt ratio, as calculated by the MNB according to Eurostat standards, rose to 85.1% of GDP by June 2014 from 79.4% in December 2013, to a level that is nearly as high as a peak 85.6% in the middle of 2010. Significance: The government has always claimed that reducing the government debt ratio is its top priority. Given that the ratio exceeds the EU's 60% maximum debt rule by a big margin, the EU also expects Hungary to make sure that its debt ratio follows a decreasing trend. In early July, the EU said that the Excessive Deficit Procedure could be restarted against Hungary in early 2015 if no fiscal correction to secure an appropriate reduction of the debt ratio has been implemented by then. Forecast: The Economy Ministry has just sad that there is no problem, as the debt ratio only rose temporarily and it will fall substantially by year end. Their argument is that the government piled up big cash reserves in H1 2014, through relatively heavy borrowing, using good market opportunities. However, in H2, they will redeem about EUR3bn of maturing FX-denominated debt, which they are not going to refinance by new debt issues - instead, they will use up part of their current substantial cash reserves. Hence the debt ratio, which is calculated in gross terms, will fall. To this argument, some analysts added that the seasonality of the budget is such that the bulk of the deficit normally appears in H1, and that partially explains a temporary run-up of gross debt in the first half of each year. Regarding these statements, government cash reserves, held with the MNB, indeed rose substantially in H1, from 2.6% of GDP at end-2013 to 7.4% of GDP in June 2014. So...