Kester Eddy in Budapest -

For Zsofia Szabo, March was a month of anguish and frenzied scrambling for information: along with more than 30,000 others, Szabo (not her real name) had invested in corporate bonds issued by Quaestor, a Hungarian financial services group that early that month was fast collapsing.

“Family members told me about Quaestor around 2010. It was 20 years old then, and seemed to be very safe. The management seemed close to the main political parties, and it was paying out only 1-2 [percentage] points above the central bank [base] rate, so it didn't seem suspicious to me,” she tells bne IntelliNews.

Szabo, a pharmaceuticals sales rep, was not even troubled when, on March 9, in the wake of the collapse of Buda-Cash and Hungaria, two smaller brokerages, queues of fellow investors formed to withdraw their savings from Quaestor.

It was the calm before the storm. A day later the National Bank of Hungary said Quaestor had issued bonds to a value of HUF210bn – a staggering €700m - when it only had a permit for HUF60bn.

There was a hole, and it was big. Quaestor Hrurira, the group's bond-issuing arm, had applied to go into administration, the firm announced.

For the rest of March, Szabo, who had €20,000 in her account, sat up late into the night, talking via Facebook to others desperate to understand the many, often baffling news reports, and recover their savings. “We got 6,000 members in two weeks,” she says.

Meanwhile, as the Hungarian press corps tore into the story, a bizarre tale of intrigue unfolded.

Quaestor Hrurira had base capital of just HUF10m but the group had made massive, dubious investments into Gyor FC, a Hungarian football club, and somehow also managed to run the even more dubious Hungarian visa office in Moscow.

In another twist, Csaba Tarsoly, Quaestor's chief executive resigned, to be replaced by someone who held a criminal record. Days later, Tarsoly said it had all been a mistake, and he would re-take the helm.

“It was all very confusing, and we had the feeling the authorities wanted it that way,” Szabo says.

Tsunami of questions

Yet there was more: two weeks after the initial panic, it transpired that the Foreign Ministry had withdrawn investments it held with Quaestor just prior to the collapse - news later confirmed by Viktor Orban, the Hungarian prime minister, who revealed that he himself had told ministries to withdraw all savings with private brokerages after the failures of Buda-Cash and Hungaria.

Opposition MPs, pointing to discrepancies between the accounts given by the ministry and the prime minister, demanded Orban's resignation.

Into this complex mix came news that Quaestor Hrurira's attempt to put itself under administraiton had stalled because the owner's signature was not on the application. This meant creditors were not protected, as had been widely assumed, since assets could be moved out of the company.

Despite determined efforts by governing politicians to pin the blame for the brokerage failures on deals and changes to financial supervision made by earlier Socialist governments, critics said the entire fiasco raises a tsunami of questions about Orban’s governments over the past five years.

“It's particularly not been easy getting reliable information on this scandal … The authorities have not shared much information. As a consequence, it is really difficult, even for me [to understand this],” says Lajos Bokros, a former finance minister in the 1994-98 Socialist-liberal coalition.

Bokros reels off a long list of what he says are inconsistencies and outright falsehoods propagated by the Fidesz government and Hungary's supposedly independent regulatory authorities.

He points to the first administration application of Quaestor Hrurira that failed due to a lack of the owner's signature. This basic error, by the chief executive of a financial services company, “allowed the government to get back its money. … That is at least suspicious to me,” he says.

And why, he asks, did the central bank, as the supervisory authority, and the chief prosecutor's office, not move to detain and question Quaestor's senior management immediately the fraud became apparent? Tarsoly, his wife and an associate at Quaestor were finally reported as detained by police investigators on March 26.

Moreover, what was the foreign ministry doing with, as it turned out, HUF3.8bn to invest in bonds via a private brokerage? Hungary has a treasury management system whereby all such monies are held on a single account at the central bank until needed.

“Government agencies, such as ministries or police, cannot have money to park in a bank,” he says, “This is a very efficient system, which was established 20 years ago, by me, when I was minister of finance.”

Pyramid scheme

Meanwhile, the government - amid a growing outcry by angry investors, and facing a hotly contested by-election in Tapolca on April 12 – announced raises in the compensation system for those hit by the Quaestor collapse. The new limit, raised from HUF6m to HUF30m (€100,000), ensures that almost all involved will recover their investment.

Politically, the government defused the situation, but still lost the by-election, Jobbik, the radical nationalist party emerging as the victor for the first time in an individual constituency.

Kornelia Magyar, a political analyst, says the fact that both Fidesz and the left-liberal opposition blamed each other for the brokerage scandals, strengthened Jobbik's credibility. “Naturally, this is not the only reason Jobbik has gained support in recent months, but it's definitely an important element,” she says.

Financially, watching the total losses from brokerage fraud topping €1bn, ordinary Hungarians are left wondering if they can ever again trust anyone in a smart suit selling investment products.

As the managing director of one financial services provider put it to bne IntelliNews: “We have been shocked ourselves by the magnitude and length of time these pyramid schemes were building in front of the eyes of the authorities. As you can imagine it is a big blow to public trust.”

The banks are also faced with higher contributions to the compensation fund, at a time when they believed there was light at the end of the long, murky Magyar tunnel. According to the central bank's estimate, they face an additional blow of HUF20bn for up to six years. OTP, Hungary's largest bank, is to fight this “unfair” move in the courts.

Naturally enough, Zsofia Szabo is delighted: “I could not even imagine this a month ago,” she says, although she balks at whether she would invest again using a Hungarian brokerage. “That is the most difficult question now.”

The government has pledged to toughen supervision and increase transparency of the sector. The prime minister has said it's time to introduce a treasury management system – which, as Bokros notes, is already in place.

For the former finance minister - who now heads the Movement for a Modern Hungary, which dubs itself a 'genuine conservative party' in the Westminster sense of the term - the entire affair is not only a damaging “brokerage and government scandal”, but another backward step in Hungary's troubled potholed path towards a proper market economy.

“In Hungary, public opinion is still very much [stuck] in the good old days of the [communist] Kadar regime, when the state was considered omnipotent,” Bokros says. Magyars, he argues, have yet to learn that “capitalism cannot mean profits are privatised and losses are socialised.”