Bloomberg News

Austrian Towns Have $25 Billion in Hidden Debt: Study

July 11, 2012

Austrian municipalities have as much as 20 billion euros ($25 billion) in off-balance-sheet debt which isn’t fully recognized in official statistics, a state- sponsored monitoring group said.

The liabilities, which are owed by entities operating public transport, utilities, theaters, museums and hospitals, aren’t counted toward Austria’s public debt and are not completely disclosed, the State Debt Commission said in a study released today. The numbers were based on a survey and excluded the capital Vienna, where a quarter of all Austrians live.

“The off-budget debt level of municipalities has probably reached a significant magnitude,” authors Eva Hauth and Bernhard Grossmann said in the study. “Off-budget companies controlled by municipalities have a significant impact on their financial situation because of their importance.”

Austria’s debt and deficit are below the euro-area average and the interest it has to pay on its debt dropped to record lows this year after investors moved into its bonds during the euro-debt crisis. While it lost its triple-A rating at Standard & Poor’s this year because of risks to its banks, it still holds the top credit rating at Moody’s Corp. and Fitch Ratings Ltd.

The Alpine republic expects its budget deficit to rise to 3 percent of gross domestic product this year, from 2.6 percent in 2011, because of bank aid given to KA Finanz AG and Oesterreichische Volksbanken AG. (VBPS) Its debt is due to rise to 74.7 percent of GDP, from 72.2 percent.

Maastricht Rules

Austrian towns and cities established companies beginning in the 1990s to operate local utilities, hospitals and public transport. Other companies constructed and managed buildings.

The 20 billion euro debt, equivalent to 6.7 percent of Austria’s GDP, comes on top of 4.6 billion euros in municipal liabilities already recognized under European Union rules, the study said. By comparison, Vienna has around 4 billion euros of officially-recognized debt, according to the study.

As much as half the municipal debt load is hidden at off- balance-sheet companies, according to estimates collected by the study. Researchers used a questionnaire that was returned by 14 percent of Austria’s 2,357 towns. Another 7.9 billion euros disclosed by municipalities in their budgets isn’t being counted toward total debt under EU rules.

Water and Waste

Companies performing water, waste and recycling management for more than one municipality had an additional 2.1 billion euros in debt according to the most recent figures published in 2008, the study said.

EU rules say that municipal companies don’t need to be counted toward state-debt levels as long as they meet conditions like covering costs through unsubsidized revenue. Whether the EU criteria is always properly applied and whether the companies have adequate assets to balance against their debt, wasn’t determined, the State Debt Commission’s President, Bernhard Felderer, told journalists in Vienna today.

“It could be that those liabilities are matched by assets and this isn’t as bad as it looks, but it could also be that they aren’t,” Felderer said. “It could be, like, ski lifts nobody needs anymore. We just don’t know.”

While outsourcing local-government services to municipal companies can increase efficiency, they can also raise risks in the absence of transparency and oversight, the study said.

“Spin-offs must be regarded critically especially if they are used exclusively as instruments for staff management, for ‘creative accounting’ with respect to the Maastricht criteria, or for a more flexible debt management,” the authors said in the study. In such cases “there is a significant debt risk,” they said.

Austria’s State Debt Commission is an independent group of experts that monitors the nation’s financing and compiles research and recommendations.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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