Maverick Hungarian central bank invests in Tesla and Netflix

Maverick Hungarian central bank invests in Tesla and Netflix
The MNB invested in bonds of two tech businesses through a company launched by one of its controversial foundations.
By Blanka Zoldi in Brussels June 1, 2016

Hungarians might as well start cheering for Tesla and Netflix, as now they have their money invested in them thanks to the country's maverick central bank. The Magyar Nemzeti Bank (MNB) invested in bonds of the two tech businesses through a company launched by one of MNB’s foundations, local press reported on May 31.

The investment company, Ferida Zrt. says that it aims to increase its assets by creating a diversified portfolio transparently and carefully. Coming shortly after a scandal over MNB’s spending, these claims are unlikely to convince critics, who argue that placing public assets on the international stock market is yet another move from MNB that puts taxpayers’ money at risk.

In 2014, the MNB used its profits to launch six charitable foundations, granting them HUF245bn (€790mn) in funds to promote financial literacy and conduct economic research. One of these foundations also launched a company called Ferida in last October to invest up to HUF20bn in government securities, stocks and bonds, weekly Magyar Narancs reported.

Ferida first attracted public attention in April, when suspicions arose that the company was behind the private equity funds that agreed to buy MKB, the former fourth-largest bank in Hungary. The MNB and Ferida, however, repeatedly rejected the claims.

Although the latest data about Ferida requested by Magyar Narancs did not reveal any evidence of MKB’s purchase, it showed new details about the company’s use of assets between its launch and mid-May. The investment company built up a portfolio of HUF8.5bn (€27.11mn), including not only Hungarian government securities and instruments of international financial institutions, but also bonds of tech companies.

Speculative

The company subscribed to USD1mn worth of bonds of electric car manufacturer Tesla Motors and USD0.5mn worth of bonds of Netflix, a global provider of streaming movies and series. Local press and opposition parties argued that investing in these companies was highly risky. The Netlix bond bought by Ferida, for example, received a B1 speculative grade from Moody’s. Critics add that there is no legislation that would allow MNB to conduct brokerage activities and act as if it was managing a hedge fund. 

"The investments in questions are obviously very risky. The MNB could not hold its foreign reserves in such instruments,” Balazs Romhanyi, director of the Fiscal Responsibility Institute, an independent economic think-thank confirmed to bne IntelliNews. “According to general principles, public assets can only be spent on the basis of authorisation (...) The law on the central bank does not entrust the MNB with the task of carrying out such investments,” Romhanyi said.

Miklos Ligeti, legal director of Transparency International Hungary also told bne IntelliNews that he does not know about any legislation that would allow the central bank - not even through its foundations or businesses - to put public money at risk.

In response to local press reports, Ferida stressed that “bonds of Netflix and Tesla, which correspond to 0.15% of the foundations’ total assets, are part of the creation of a diversified corporate portfolio that is in harmony with Ferida’s investment policy aimed at increasing assets”.

According to data published by Magyar Narancs, Ferida holds HUF4.4bn in bonds of Raiffeisen, Erste, Barclays, Commerzbank and RBS.  Ferida also bought USD5bn worth of Hungarian government securities and bonds of the Hungarian Development Bank and Eximbank (USD1.5mn each). It also invested HUF1.2bn in oil and gas group Mol. 

Ferida emphasized in its press release that it does not conduct brokerage activities, and it creates its long-term investment portfolio “transparently and carefully”.

Friends and relatives

However, the claims of Ferida’s responsible conduct raise suspicion after a recent scandal over MNB’s spending. Following a Constitutional Court ruling that blocked the government's attempts to remove the foundations’ spending from public scrutiny, it was revealed that they spent around HUF20bn without announcing public procurements, granting a significant amount of funds to people close to MNB’s governor Gyorgy Matolcsy and other allies of Prime Minister Viktor Orban.

“The new details [about Ferida’s risky investments] only confirm our belief – which had already been quite strong – that the MNB committed a misappropriation of public funds,” Ligeti told bne IntelliNews.

Romhanyi also pointed out to bne IntelliNews that in many cases, the MNB foundations’ public assets are spent on supporting friends and relatives of Matolcsy. This raises doubts whether taxpayers will benefit from Ferida’s investments if they turn out to be profitable. “The return on investments would again be spent on purposes that cannot really be considered public tasks,” Romhanyi said. Meanwhile, the “negative part of the risks” will have to be born by taxpayers, in case Ferida loses money on the investment.   

“From an economist’s perspective, the present situation is evidently bad and indefensible,” Romhanyi said. He added that each member of the parliament who does not support legislation that brings again the use of MNB’s public assets under the parliament’s control, “bears a personal responsibility for losing public money and for taking unnecessary risks”.

 

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