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May 09, 2016 - Zoltán Kovács

Here’s the golden question in the story about the Hungarian Central Bank

The media is always quick to reach a verdict. “Scandal” and “corruption” appear as frequently in sensationalist headlines as “good day” at a busy newsstand. But there is one, golden question that media coverage has missed in the story of the Hungarian Central Bank and the foundations it established, and that golden question is this: How far does a national bank’s independence extend?

The key to understanding this recent story is to understand the debate around what is and what is not public money. In Hungary, and around the democratic world, the rules of forming a foundation are similar, in the sense that once the endowment is established, the founder hands over authority to the foundation’s board. It cannot be taken back.

But can a bank form a foundation? Can a Central Bank, which is publicly owned but not responsible to the government, do the same? If yes, does the spending of its foundations remain under the purview of rules governing the use of public funds despite being officially independent and autonomous of its founder? And what if the endowment for the foundations is made up from the profits of the bank? More specifically, a detail completely missing from most of the coverage, what if the projects funded by the foundation could be supported only with revenue made from the endowment and that the endowment itself could not be touched?

Eventually, it is the public to whom the Central Bank is responsible and the Parliament sets the rules for its operation. The story begins when the Central Bank independently decided to use a small portion of its profits to set up foundations for research and knowledge transfer.

Let’s pause for a moment and ask, what’s more important here? Transparency or the legitimate interests of legally independent foundations?

This legal dilemma rapidly became political as the Central Bank and its foundations were slandered with charges of corruption and criminality.

Hungary’s Parliament first approved a law that considered the question from the legal standpoint of foundations. That law said that, similar to other foundations, the Central Bank’s foundations are not public, because they are managed by a board and not by the founder, the public institution that is the Central Bank.

After the parliament passed the proposed law, it went to President of Hungary János Ader for signature. The president, who is a founding member of the ruling party and was voted into the post by the Fidesz-KDNP majority in parliament, chose not to sign the legislation and instead sent it to the Constitutional Court for review. The Constitutional Court, the one that is supposedly stacked with cronies of the ruling party, decided against the proposed law, finding that the spending of these foundations must be made public.

Just a brief aside here: Anyone recall the criticism that Hungary’s government lacks checks and balances?

From documents released to the public, it turns out that a portion of funds was invested into bonds and other financial instruments, as well as real estate and arts. Another much smaller portion was granted to different projects for research, education and dissemination in the media. As a result, the foundations’ assets today are worth more than the original endowment, so the foundations fulfilled their missions with sound financial management. As it turns out, the foundations did not fritter away a public good. The endowments were not only untouched but, in fact, appreciated in size as the foundations began to carry out their respective missions.

The current Central Bank led by Governor György Matolcsy is the most successful in Hungary’s modern history. In coordination with the government, it supplies the country with historically cheap financing by keeping the interest yields low, but still at a rate where state bonds are appealing to investors. It works in concert to reduce the country’s debt-to-GDP ratio and maintains a stable growth pattern for Hungary’s economy. The Central Bank’s policies have produced significant gains for the state budget’s fiscal position, translating into an annual 50-100 billion HUF ( 1.6-3.2 billion EUR), as Minister for Foreign Affairs and Trade Péter Szijjártó pointed out recently. Meanwhile its foundations function according to the legal framework and have been audited by the competent state authorities.

Can a well-functioning Central Bank like this decide to set aside some of its profits for use by foundations that research relevant issues, raise financial awareness and spread knowledge? Most certainly. That’s part of the independence of the Central Bank.