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Hungary has a unitary government system with 19 counties, 23 "cities with county rank" and about 3200 local (municipal) governments. The financial architectureof local governments is quite complicated and budget constraints are "halfway" between soft and hard. After an early and temporary "municipal bond boom" in the middle of 1990's, the size of indebtedness started to increase considerably, first in 2002. By the end of 2011 the size of financial obligations deriving from local borrowing amounted more than 4.7% of GDP.The paper is aimed at examining factors that might have been behind indebtedness and tries to separate the effect of internal and external variables for the period between 1990 and 2011. According to the results of the empirical analysis local authorities' borrowing activity cannot be explained only with help of quantitative macro-economical indicators such as total sub-national revenues, expenditures, CPI and GDP.Namely, the formation of debt was mainly determined by behaviour patterns of local governments and byrandom (unforeseeable) shocks caused by changes in central regulation. The short term patterns in borrowing attitude are due to the four-year long election cycle of local representatives while adapting to random shock happens quickly within one year. Four different time-phases (periods) can be determined, which can be described by different characteristics and makes explanation for the formation of local debt: Early development of subnational debt markets (1990-1995); restriction (1996-1997); moderate growth (1998-2006); municipal bond-boom (2007-2010).