Hungary Pushes the Limits of Central Bank Asset-Purchase Plans

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Hungary’s central bank is about to take its $2.5 billion asset-purchase program to the next level as it prepares to buy the bonds of a company owned by one of its entities.

The debt sale under the central bank’s plan, flagged in a corporate filing, may further blur what’s become a hazy boundary on what central banks around the world can and can’t do to buoy economic activity during the global coronavirus pandemic.

While peers are also edging into uncharted territory to provide stimulus -- the European Central Bank is buying corporate bonds straight from issuers -- none has directly bought the debt of central bank-affiliated companies.

Hungary Pushes the Limits of Central Bank Asset-Purchase Plans

The transaction would come on the heels of a proposal by Governor Gyorgy Matolcsy to provide mortgages directly to prospective homeowners -- testing another taboo about direct lending by central banks.

“The central bank has ventured into dangerous territory with its purchases on the primary market, which add a layer of risk,” said Peter Rona, an economist and former member of an opposition party who earlier served on the central bank’s supervisory board.

The monetary authority is preparing to buy the bonds of GTC SA, a Poland-based property developer. The company is controlled by Optima Zrt., which was set up to manage a $1 billion endowment the central bank established for foundations it created in 2013.

The foundation “and the companies it owns are autonomous legal entities that are independent of their founder, and in accordance, their decisions are taken by executives who are independent of the central bank,” the National Bank of Hungary said in an emailed response to Bloomberg questions.

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The deal would mark a new milestone for Matolcsy, who has built a legacy of chipping away at the barriers between the government and the central bank. He’s vowed to support the economic policy of Viktor Orban, whom he previously served as minister, via unorthodox measures that at times have clashed with traditional monetary thinking.

Since the launch of its asset-purchase program last year, the central bank has bought the bonds of more than 40 companies, including refiner Mol Nyrt., real-estate developer Cordia International Zrt., a tractor wholesaler and the operator of local McDonald’s restaurants. All included purchases in the primary market.

In April, Optima acquired a controlling stake in GTC, which specializes in office development in central Europe, including in Poland and Hungary.

GTC’s Hungarian unit received a credit score from Scope Ratings last week, a first step required by the central bank for companies to participate in its program. The Scope assessment said GTC plans to sell 36 billion forint ($120 million) in green bonds.

GTC’s plan to sell bonds under the central bank’s program doesn’t breach monetary financing rules because the state has no influence over its owners’ decisions, Optima said in an emailed response to Bloomberg questions.

The central bank’s foundation “operates independently of the central bank, and the bank -- by law -- is independent of the state,” Optima said.

Similar central bank asset-purchase programs in the euro area and the U.K. bar authorities from buying notes on the primary market from “public undertaking,” or companies where the state has a controlling stake.

The Hungarian program has no such prohibitory clause, according to a term sheet on the central bank’s website, though it references the ECB’s plan as a model.

“We live in the world of quantitative easing, so whether you like it or not everybody is doing monetary financing de facto,” said Raffaella Tenconi, the founder of ADA Economics in London. “The question is how much and what the money is used for.”

The ECB has a supervisory role over the Hungarian central bank. It has previously expressed monetary-financing concerns about its foundations, including investments in government bonds, education and real estate.

The foundations weren’t found in violation of monetary financing rules, and the ECB stopped short of launching a formal infringement proceeding. Optima did, however, sell its holdings of state debt and used the proceeds to boost property investments.

©2020 Bloomberg L.P.

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