The entrepreneurship of the Hungarian central bank is not appreciated

Despite the Hungarian Constitutional Court decision that the central bank of Hungary has to disclose information on invested funds not everything was published, and a new legislation is on its way.
The entrepreneurship of the Hungarian central bank is not appreciated

Pallas Athena, National Museum of Antiquities, Netherlands (Michiel2005, CC BY-NC)

György Matolcsy, the Governor of the Hungarian National Bank (Magyar Nemzeti Bank, MNB), decided two years ago that the transfer of nearly HUF300bn from profits (EUR946m) to six foundations established for that purpose by the central bank means that these funds are no longer a subject to the same controls as any other public funds and therefore no one can demand their disclosure. In March this year, after more than 2 years of disputes, the parliamentary majority expressed the same opinion and amended the act on the National Bank. It is a controversial direction, however, and the position of the central bank was loudly criticized.

However, the Hungarian President János Áder (close to the ruling party Fidesz) refused to sign the law and send it to the Constitutional Court in order to determine its compatibility with the Constitution. The Hungarian Constitutional Court, which consists mostly of judges associated with the government, have found – much to everyone’s surprise – that the amendments are inconsistent with the constitution and that the funds of the central bank do not cease to be public funds after they are transferred to a foundation. On the basis of the Constitutional Court’s ruling, on March 2016 the Supreme Court ordered the disclosure of reports on the expenditure of all the foundations of MNB. So information was published and surprised everyone – including some members of Fidesz, who were simply unable to comment on the disclosed revelations for several days.

The most restrained members of the opposition demanded the resignation of the Bank’s governor. Others went much further, submitting a report on the possibility of embezzlement of public funds to the Attorney General.

What has exactly happened?

The monetary policy of the MNB, carried out since 2013 (under the leadership of the new governor in co-operation with a new monetary council, mostly consisting of people close to Fidesz), has the goal of a weak forint. At the same time, the government carried out the operation of conversion of the huge mass of Swiss franc nominated mortgages into forints. In this operation the role of MNB came down to the sale of the Swiss francs purchased earlier for the purpose of central bank reserves to the commercial banks. This sale was very beneficial – the Hungarian National Bank earned HUF30-40 forints on one Swiss franc. In 2014, this resulted in profits of over HUF136bn (EUR428.5m) from this account alone.

This was not the end of a good fortune for the central bank. A huge part of the profit was a consequence of the low exchange rate of the forint. Considering that the foreign reserves of the MNB reached EUR31bn, the change in the forint exchange rate alone yielded a HUF650bn (EUR204.8m) surplus in that single year. This amount was not recognized in the balance sheet as a profit.

MNB decided that it would be best to spend the money, not through the state budget but on its own, supporting the government in its efforts to stimulate the economy and reduce the state’s dependence on foreign creditors. For that purpose, in order not to break the rules, the bank established foundations which in turn began to buy government bonds on a large scale. This is because in the EU a central bank can only buy Treasury bonds on the secondary market and may not acquire them directly from the source.

The fountain of wisdom

The Hungarian National Bank established six foundations with similar names. Each was named after the Greek goddess of wisdom, Athena: Pallas Athéné Domus Animae Alapítvány (PADA), Pallas Athéné Domus Scientiae Alapítvány (PADS), Pallas Athéné Geopolitikai Alapítvány (PAGEO), Pallas Athéné Domus Concordiae Alapítvány (PADOC), Pallas Athéné Domus Mentis Alapítvány (PADMA), Pallas Athéné Domus Innovationis Alapítvány (PADIA). (Alapítvány means foundation in Hungarian).

The structure of the balance sheets of all the foundations is similar – they are dominated by the Hungarian government bonds bought with the funds from the central bank. In this light, it would be difficult to deny the idea of a common investment strategy of the foundations. Five of them have government securities with a total value of HUF23-26.5bn (EUR72.5-83.5m). Each of these five also holds foreign exchange assets with a value equivalent to HUF14 to 20bn (EUR44m to EUR63m).

All except one were also buying very expensive real estate, some of which required costly renovations. All six foundation have between HUF2 to 10bn (EUR6.3m to EUR32m) in the form of shares in a variety of commercial ventures, including banks.

The purchase of government bonds by the foundations established by the central bank is controversial. These concerns are weakened, however, in light of the actions of the European Central Bank which prohibits such transactions but itself purchases large quantities of government bonds of the euro zone countries, thereby imitating the extremely dynamic policy of quantitative easing conducted several years ago by the Federal Reserve.

Therefore, in Hungary there is a conviction that the MNB will not have major problems with its bypassing of the rules. Besides, the purchases of the foundations do not have a decisive influence on the market of Hungarian government bonds, although on the other hand, they are not irrelevant, especially when it comes to the timing of the transactions. In addition, MNB’s activities go hand in hand with the government’s efforts to reduce the state debt in foreign currencies and in bonds held by foreigners. Such justification may guarantee the support of the wider public, so where does the noisy criticism come from?

An opportunity to benefit

Hungarian public opinion has learned that alongside these activities, certain private individuals and businesses achieve financial benefits reaching hundreds of millions of forints. The secondary beneficiaries of the operations carried out by the foundations of the MNB include the members of the family of MNB governor György Matolcsy and businessmen who are close to Viktor Orbán. One of them is Lőrinc Mészáros, a friend of the Prime Minister from his native village of Felcsút, its mayor, and also the curator of a foundation owning the football team, the modern stadium and the football school known as the Puskás Academy.

Friends and members of the family of governor Matolcsy have been awarded major contracts from the bank’s foundations without a public procurement. Tenders are required for the expenditure of public funds but Matolcsy and his colleagues have decided that money donated to these foundations loses its status and can be used without such rigors and restrictions. Supervision over the foundations was exercised either by Matolcsy himself, as a member or chairman of the given supervisory board, or by other persons from the management of the Hungarian National Bank, including the Executive Director of the MNB, Marianna Polt-Palásty, the wife of the Attorney General.

The opposition press believes that the Executive Director of the central bank, who is also the chairwoman of the supervisory board of one of MNB’s foundations and a member of the board in another, must have known about the controversial decisions, such as awarding contracts to Matolcsy’s friends and family. Her husband, Hungary’s Attorney General, was asked whether he thought his wife was suspected of misappropriation of state funds. He denied this, indicating that, after all, there are no proceedings pending against her.

When asked whether he has, by any chance, lost trust in the President of the central bank and whether he is considering his resignation, Prime Minister Viktor Orbán announced that “heaven would have to come crashing down on earth” in order for him to lose confidence in Matolcsy. In what is probably a random coincidence, but to the surprise of observers, several days ago MNB announced that it transferred HUF50bn (EUR157.5m) from the profits to the state budget.

Despite the court order the data about the financial dealings of the foundations have not been published in their entirety to this day. The amounts of the transactions have been disclosed but the names of the persons involved and the counterparties have not been provided.

There is little time, however, because a new act is being drafted in place of the law rejected by the Constitutional Court. This new act will enable companies and foundations with the participation of the State Treasury to maintain the confidentiality of their financial data on the grounds of their own economic interest.

The foundations of the Hungarian National Bank not only support the friends and family of the president, but also co-finance his scientific and teaching activities, as well as the university founded under Matolcsy’s patronage. One of the MNB’s foundations allocated HUF70m (EUR220,000) on a sponsoring of a book about minister Matolcsy’s activities when he was a Minister of Economy, and his clashes with the International Monetary Fund. The book was written by his former secretary and translated into several languages.

In an interview with an extreme right-wing television station Echo, Csaba Letner, a member of the board of trustees of the Pallasz Athéné Domus Scientae Foundation, formulated the political objective behind the creation of the central bank’s foundations. He said that all universities must teach and as a result enforce the social acceptance of the views presented by Matolcsy, because only that will allow Orbán’s party to win the parliamentary elections in 2018.

“Everything which has been presented so far has to be replaced and excluded and the foundations of MNB have a fundamental role to play in the fight against the enemies of unorthodox thought (read: anti-liberal),” emphasized Csaba Letner.

Pallas Athena, National Museum of Antiquities, Netherlands (Michiel2005, CC BY-NC)