Hungarian central bank governor Gyorgy Matolcsy goes on spending spree

April 17, 2014


Hungarian central bank governor Gyorgy Matolcsy:  What isn’t forbidden is allowed

(Editor’s note: We considered entitling this article “The inmates are running the asylum” but decided against it lest we give the criminally insane or their minders cause for offense by comparing them to Hungarian central bank governor Matolcsy Gyorgy and his handlers).

The Hungarian National Bank (MNB) announced yesterday that it was filing a criminal complaint against Hungarian news portal for its 16 April 2014 article entitled “MNB distributes money to its friends without oversight”. In an official statement released later that day, MNB claimed the article contained “false allegations” that “undermine public trust” in this important governmental institution.

However, in an interview given to ATV that night, MNB supervisory committee member Peter Rona, who teaches economics at Oxford and acts as an adviser to liberal/green party Politics Can Be Different, said that most of the information contained in the article was correct.

According to the article MNB’s executive committee, led by central bank governor György Matolcsy, formally decided in December of last year that the bank would spend (1) HUF 50 billion (USD 225 million) acquiring real estate the first half of 2014, and (2) HUF 40 billion (USD 180 million) renovating existing buildings. These decisions were not made public at the time and were only recently came to light in the form of a report prepared by the bank’s supervisory committee raising a number of concerns.  Among them is the fact that the decisions are not supported by any documentation in the way of expert opinion, impact studies, or even lists of specific properties to be acquired.  Nor is any explanation offered as to why it is necessary for the central bank to spend HUF 90 billion on the acquisition and renovation of real estate.  As to how how the central bank is to go about doing this, the two decisions merely provide for “the MNB executive committee to decide based on internal rules”. reports that accorting to an oversite committee report only recently made public, MNB has already acquired two properties in the amount of HUF 2.3 billion (USD 10.5 million).

One property, a building in the Szentharomsag square that had been empty since 2011, was reportedly purchased from the Hungarian Academy of Science in order to accommodate the additional space needs arising from last October’s assumption by the MNB of all the functions of the Hungary’s financial oversight authority (PSZAF).  When making the decision to do away with the separate and distinct authority, Matolcsy justified the decision in terms of cost savings.  After all, when assuming the governorship of the central bank last March he said the bank was to continue to be run in a cost efficient manner.   At yet it appears that the entity formed by the merger is to be larger than the sum of its parts. HUF 90 billion larger.

Moreover, the article notes that the cost to taxpayers in 2014 of operating MNB and PSZAF together is 36.8 percent higher than what they cost to operate separately in 2013– HUF 29.4 billion instead of HUF 21.5 billion.  However, the former figure includes the HUF 6 billion spent by the bank in 2014 on the “largest communication tender in the history of Hungary”.

(Editor: The so-called “growth credit” media campaign blanketed the country with billboards and posters of a happy baker holding a huge loaf of bread.  By coincidence this campaign, which was unprecedented both in size and scope, made it virtually impossible for political parties other than Fidesz to place billboard ads during the six week official campaign period preceding the general election of 6 April).

The article also criticizes the bank for February’s decision to spend HUF 30 billion over the next four years acquiring valuable objects formerly belonging to the state, and another HUF 10 billion “exercising social responsibility” within the framework of the so-called Corporate Social Responsibility (CSR) program.

The article reports the oversight committee’s recommendation that “internal controls be strengthened” and “separate regulations” be passed to govern specifically what the MNB may and may not spend hundreds of billions of taxpayer money on “without supervision of any kind”.  The report notes that one of Matolcsy’s first acts as central bank governor in March 2013 was to terminate the director responsible for internal controls.

The article also notes the absence of any government directive explaning how the central bank is to implement the CSR program.

The Hungarian National Bank is independent of the government.  Its operations are only subject to the examination of two bodies: the oversite committee and the State Auditors Office.  The central bank is responsible for tasks defined by the central bank law (price stability, financial stability, and supporting growth).  Its goals must be achieved in a manner respectful of its founding documents. In the material summarizing the central bank’s three year CSR strategy, no mention is made of acquiring property.  And no mention is made in the central bank law about activities relating to social responsibility.

But real estate is not all the Hungarian central bank has its eye on. reports that, based on documents it has seen, MNB intends to acquire an antique violin for the use of Hungarian violinist Felix Lajko that was never the property of the state, and a Bruegel painting that has been on loan from the Museum of Fine Arts for nearly 100 years..  Apart from the fact that the decision offers no reason for acquiring this particular instrument for that particular artist, reports that the amount allocated for this purpose is EUR 4 million, is incorrect as the very same instrument was valued at between EUR 160,000 and 200,000 last year. also reports that the electro-hiphop music group Balkan Fanatik is to receive HUF 60 million (USD 275,000) over the next three years from the CSR fund.  According to the group’s keyboardist, MNB contacted them and offered to support them from its cultural sponsorship program.

Other intended beneficiaries of MNB largesse (for reasons only known to Matolcsy and company) are:.

  • The Opera/Erkel Theatre, which is to receive HUF 450 million over three years
  • The Liszt Ferenc Conservatory, the National Theatre, and the Palace of the Arts, which are to receive HUF 906 million.
  • The Budapest Music Center, which to receive HUF 150 million over a period of three years.  The Design Terminal and Kecskemétfilm are to receive HUF 60 and 150 million, respectively.
  • A vascular clinic, a maker of tapestries, and an organization by the name of the Three Prince and Three Princesses Foundation are also on the list ( notes that no such foundation exists but that this is “obviously a mere detail.”)

The oversight committee is the central bank’s internal control body responsible for supervising all aspects of bank operations. finds it “extra strange” that the oversight committee was not involved in the decision to spend an extra HUF 90 billion on real estate.  It notes that, under previous central bank governors, even the decision to purchase vehicles for MNB employee use was discussed with the oversight committee at length.

Although a meeting was held in March it which oversight committee members could ask questions, writes that they “only received evasive or cynical answers”.  According to the article the committee objected to the “murkiness of the decisions and the reasons given for the decisions” and that even the monetary council member responsible for the acquisition of valuables was unable to provide answers.

The article then offers the following quote from an anonymous source:

It is not clear what the money is being used for, what the basis for its distribution is. It is not clear what will be the fate of the items purchased. And it appears the directors did not have long term plans. It appeared as though the point of the whole thing was that those sympathetic to the government get money before the election in a manner that bypasses parliament.

In response to the oversight committee’s objection on the grounds that the central bank law does not authorize the MNB to undertake such expenditures, the bank’s lawyers answered that everything was permitted that the law does not forbid.  To this Peter Rona reportedly responded that this only applies to individuals, and that as a legal entity the central bank could only do what the law specifically authorizes it to do.  When asked whether the central bank could sell ice-cream, the bank’s lawyers reportedly answered “yes.”

When asked why the central bank was undertaking a social responsibility project in lieu of governmental institutions specifically created for this, they answered that the “central bank considers the creation and protection of value enriching the Hungarian nation to be one of its strategic long term goals.” notes that while the central banks of other European countries have from time to acquired valuables, since the first Fidesz government appointed Zsigmond Jarai central bank government, its operations have been built on economy.  Index points out that under Matolcsy’s predecessor, “the central bank took care to spend little money, and that money put aside for such purposes did not exceed HUF 30-40 million a year”. According to since 2001 the central bank’s operations were based on the frugal Swedish model. “The point was that the central bank should be run in a cost effective manner.”  The article concludes that “under the direction of Matolcsy the MNB has replaced the northern model with some other model.”

As for where the money to fund these acquisitions was to come from:

The central bank as the issuer of the forint could simply print the money.  However, this is a rather complicated mechanism which of course has a price and which cannot be done for long without adverse consequences.  Another possibility is that the central bank reorganizes its reserves by selling liquid assets and using them to purchase less liquid ones.  The differences is that German state bonds pay interest and works of art do not.  Reducing the bank’s foreign currency holdings would result in a profit of HUF 20 for every euro sold, and that profits arising from the sale of foreign currency could be used for this purpose.  In the end it is the Hungarian taxpayers who will foot the bill either in the form of higher inflation, small central bank earnings, or higher budgetary expenditures.

As for why the MNB should act as the vehicle for such state expenditures and not other state institutions such as art museums or music conservatories, offers the following explanation:

The MNB is a good place to spend money because, as an independent institution, its decisions are not debated in parliament and its transactions in general are far less public.

No wonder Matolcsy wants to bring up on criminal charges!

However, in light of Rona Peter’s comments last night, it is doubtful public prosecutors will have sufficient grounds for indictment, let along conviction.

Rona, who is a member of the MNB supervisory committee, told ATV that the committee had identified three areas of concern, the first being the legal basis for these expenditures.  According to Rona “the supervisory committee did not find anything in the law that would authorize the Hungarian National Bank to do this”.  To this the bank’s lawyers reportedly answered “We don’t need a legal basis.  What isn’t forbidden is allowed.”  Rona said that a public institution “may only undertake what it is authorized to do by law”.  According to Rona, the oversight committee asked for an official legal opinion explaining the legal basis for expenditures extraneous to its main purpose.

The second concern reportedly raised by the oversight committee was the “confusion such an attitude creates as to the competence of state public institutions”.  “Conservatories buy instruments.  Museums buy paintings.  In every normal country the competence is divided.”

The third objection mentioned by Rona was the complete lack of criteria by which the decisions what to purchase, for how much, and to whose benefit was to be made.

Rona told ATV that he was convoking an extraordinary meeting to clarify certain matters that have happened since January.

Presumably this time Matolcsy will take the oversight committee’s questions and comments more seriously.

Referenced in this article:

Barátoknak osztja a pénzt az MNB ellenőrizetlenül,, 16 April 2014

Rona Peter,, 16 April 2014