Hungary Central Bank Foundation Outlays Probed by Eurostat, ECB

(Bloomberg) -- European authorities are probing spending by foundations connected with the Hungarian central bank to determine whether they affect budget data supplied by the eastern European nation and if they violate the bloc’s monetary-financing rules.

Eurostat is discussing with Hungarian authorities whether or not outlays by six foundations set up by the central bank constitute government spending, in which case they should be accounted for in national budget calculations, according to a statement published by the Luxembourg-based agency on Friday. Eurostat reiterated that state-owned lender Eximbank should be included in budget calculations, which would raise government debt levels.

Eurostat’s review adds to a probe by the European Central Bank, which may end in legal action against Hungary if the Budapest-based central bank is found to have violated rules, according to an Oct. 19 letter sent by ECB President Mario Draghi to European Parliament members published Friday.

National Bank of Hungary President Gyorgy Matolcsy established six foundations in 2013, appointed family and friends to run them and proceeded to funnel almost $1 billion into their coffers as he sought to remove them from the public purview. The Constitutional Court ruled this year that the assets of the foundations, some of which invest in education, were public funds. The central bank has said it will make the foundations’ finances more transparent.

The entities, known collectively as Pallas Athene foundations, said on Friday that they reduced their government bond holdings by 56 billion forint ($198 million) this year and invested a share of it in real estate to address the ECB’s concerns.

Hungary’s debt level fell to 74.7 percent of gross domestic product last year from 75.7 percent in 2014, Eurostat reported Friday, based on revised figures. The budget shortfall narrowed to 1.6 percent of GDP from 2.1 percent in 2014.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net. To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Michael Winfrey, Peter Laca