Eurostat and the ECB smell something fishy in Hungary

October 22, 2016

Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in Frankfurt, July 5, 2012. REUTERS/Alex Domanski
Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in Frankfurt, July 5, 2012. REUTERS/Alex Domanski

Eurostat, the European Commission’s statistical agency, continues to take issue with how the Hungarian state is still cushioning its government debt figures by not accounting for the debt of Eximbank, Hungary’s state-owned export bank, reports 444.hu.

According to a report issued by Eurostat on Friday, “Eurostat is maintaining the reservation on the quality of the data reported by Hungary in relation to the sector classification of Eximbank (Hungarian Export-Import Bank Plc). Eximbank needs to be reclassified inside the general government sector which will result in an increase in government debt.”

According to 444, Hungary’s state debt would increase by 2 percent if Eximbank’s debts were accounted for by the state.

But Eurostat did not stop there, and went on accuse the Hungarian National Bank (MNB) of undertaking operations on behalf of the government.

“Moreover, Eurostat is discussing with the Hungarian statistical authorities the possible rerouting of operations carried out by the Hungarian National Bank, deemed to be undertaken on behalf of government,” they wrote.

Eurostat’s concerns in this regard are shared by the ECB.

A letter from European Central Bank president Mario Draghi to MEP Udo Bullmann published on Wednesday shows the ECB is still keeping an eye on how the MNB’s Pallas Anthéné foundations purchase government debt — an act referred to as prohibited monetary financing.

According to ECB’s Draghi, the Treaty on the Functioning of the European Union prohibits central banks from engaging in the direct purchase of government bonds — regardless of whether it is the central bank or a subsidiary behind the purchase. In Hungary’s case, the MNB founded and endowed a number of foundations, some of which used their endowment to purchase government securities.

While Draghi did not comment on the monitoring process regarding the MNB’s purchase of government securities, he did warn that “the ECB will consider the appropriate steps to take and exercise its discretion to potentially initiate infringement proceedings….if it finds that any national central bank has failed to fulfil an obligation under the Treaties.”

According to 444.hu, shortly after Eurostat released its report, the MNB’s foundations released a statement saying

“The Pallas Athéné foundations, having reviewed the observations of the European Central Bank, have taken active measures to [liquidate] its portfolio of government securities.”

But, lest we consider this to be an admission on behalf of the MNB that they were engaged in prohibited monetary financing, the MNB’s foundations also wrote

“The position of Pallas Athéné foundations is that their portfolio of government securities does not violate the regulations of the ECB.”

According to the foundations, they sold off some HUF 56 billion of government securities in 2016.

This number may be high, but it is still not known how much of the almost USD 1 billion endowment received by the foundations was spent acquiring government securities.

In any case, it is noteworthy that the foundations released this statement right after both the Eurostat report and the ECB president’s letter were released. Perhaps it is an indication that the MNB’s foundations do not operate as independently from the central bank as it would have the public believe.