Revisiting Hungary's Bankruptcy Episode

WDI Conference Paper, "Financial Sectors in Transition: A Conference on the Design of Financial Systems in Central and Eastern Europe

Posted: 5 Dec 1999

See all articles by John Bonin

John Bonin

Wesleyan University - Economics Department

Mark E. Schaffer

Heriot-Watt University - Centre for Economic Reform and Transformation; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: September 1999

Abstract

We take a retrospective look at Hungary's experiment with a articularly draconian bankruptcy law. For an eighteen-month period in 1992-93, the Hungarian bankruptcy code contained an unusual automatic trigger that required the managers of firms that held overdue debts of any size to any creditor to initiate reorganization or liquidation proceedings to avoid prosecution under the civil code. We analyze the impact of this "legislative shock therapy" on the economy during the period and examine its effects on resource reallocation and institution building. We argue that, although a key motivation for introducing the automatic trigger was to harden the budget constraints of firms, the empirical evidence suggests that hard budget constraints were already being imposed by banks and by other firms, and the effect of the automatic trigger was rather the exacerbation of a credit crunch and disruption of economic activity. We also suggest that other features of the Hungarian bankruptcy framework not connected to the automatic trigger provide the more important lessons. In particular, it is possible to introduce a bankruptcy track in a transition economy that can both transfer control of the firm from management to creditors and maintain the firm as a going concern while restructuring takes place.

JEL Classification: P31, P34, G21, G30

Suggested Citation

Bonin, John P. and Schaffer, Mark E., Revisiting Hungary's Bankruptcy Episode (September 1999). WDI Conference Paper, "Financial Sectors in Transition: A Conference on the Design of Financial Systems in Central and Eastern Europe, Available at SSRN: https://ssrn.com/abstract=199109

John P. Bonin (Contact Author)

Wesleyan University - Economics Department ( email )

Middletown, CT 06459
United States
203-685-2000 (Phone)

Mark E. Schaffer

Heriot-Watt University - Centre for Economic Reform and Transformation ( email )

School of Management - Department of Economics
Edinburgh EH14 4AS
United Kingdom
+44 131 451 3494 (Phone)
+44 131 451 3008 (Fax)

HOME PAGE: http://www.hw.ac.uk/ecoWWW/cert

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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