How foundations linked to Hungary’s central bank used $1 billion

THE 18th-century baroque corner mansion at 21 Uri Street is a jewel in Budapest’s crown. The building, which once served as the local town hall, boasts rococo wall carvings, a statue of Pallas Athena set into an exterior sconce, two interior courtyards and a marvellous onion-domed clock tower. It is owned by PADA, an educational foundation, which plans to turn it into an economics college, kitted out with luxurious facilities and a gourmet wine-and-cheese shop. But the source of the project’s funding is unusual: PADA received the property, valued at 2.4 billion forints ($8.8m), as a gift from the Hungarian national bank.

The development at 21 Uri Street is part of a growing scandal over foundations created by the national bank, which critics say are often run for the benefit of the government and its allies. PADA is one of six foundations which the bank set up in 2014, funding them with total grants of about $1 billion, as well as property worth $25m. The foundations were expected to support themselves in part by investing in government bonds, but their finances remained secret. The sums involved are huge for Hungary, where the entire GDP was $125 billion last year.

The national bank’s governor, Gyorgy Matolcsy, has long prided himself on his opposition to “neoliberal economics”. He and the government argued that the foundations were private institutions not subject to public scrutiny. But opposition politicians sued to get details of the foundations’ spending, and in March the country’s top courts ruled that it must be made public. For weeks, the press has delighted in revelations of the foundations’ profligacy.

The foundations have awarded grants to a right-wing publisher to publish books by pro-government journalists and by Mr Matolcsy’s former chief of staff. One funded the publication of a six-volume heroic history of Hungary, written not by a historian but by an oncologist, which board members believed would “strengthen the patriotic sentiment against the globalist views”. An internet news site, vs.hu, received $1.8m; on April 25th a group of its journalists resigned in protest, most saying they had not known about the grants.

Viktor Orban, the prime minister, has defended Mr Matolcsy, saying “heaven and earth would have to collide” before he would condemn the bank chairman. But opposition parties say the funds should have been part of the state budget, and that the foundations are run by government cronies close to Mr Orban’s ruling party, Fidesz. The foundations are clearly not part of a central bank’s remit, says one former central banker, who thinks the scandal has seriously damaged the bank’s reputation for independence: “This will have a cost, and that cost will be paid by taxpayers.”

The European Central Bank will also be concerned. In its annual report last month, the ECB expressed concern over the foundations’ lavish spending. The central bank says the foundations are legally established, independent organisations with their own boards of trustees. But Mr Matolcsy is chairman of the board at one foundation, and sits on the board of another. Many of the foundations’ beneficiaries are allied to or connected to Fidesz.

Hungary has a long tradition of blurring the line between public and private assets. During the vadkapitaliszmus (“wild capitalism”) of the early 1990s, Socialist politicians acquired state-owned property on the cheap, taking advantage of connections and a weak legal system. Budapest cynics say that Fidesz’s opponents are simply angry because it is better-organised than the Socialists. Fidesz is still ahead in the polls, while the opposition remains weak and splintered. But the revelations about the central bank’s foundations will have political consequences in the long term, says Peter Kreko of Political Capital, a think-tank. They underline a sense that “the government is working for private interests, not the public good.”