Bulgaria’s banking botch up

In late 1996, Bulgaria found itself beset with both a banking crisis and hyperinflation. Nine out of the country’s 10 largest banks were failing, and inflation topped 2,000 percent on an annualized basis a few months later. Corruption, patronage, and self-dealing among Bulgarian banks and politicians became visible to the world. The deterioration of the financial system was matched only by Bulgarians’ deteriorating confidence in their government. As pensioners lined up around the block for access to their deposits, protests and riots swelled, leading to the collapse of the socialist-led government. Ultimately, the Bulgarian National Bank (B.N.B.), the International Monetary Fund, and the government stepped in with a series of bold measures to stabilize the country. Reforms such as a long-term commitment to a currency board providing a stable and predictable exchange rate paved the way to a decade of sustained growth and social stability, leading the country into the European Union in 2007. Bulgaria’s fiscal balance and debt-to-GDP levels became the envy of much of Europe as investment poured in, the rule of law took root, and parliament managed a democratic consensus, albeit a messy one.

Yet today, Bulgaria finds itself on the precipice of another potential crisis. The 1997 crisis was rooted in corruption and self-dealing between banks and their political sponsors, and Bulgaria is showing that old habits die hard. Following an unexpected result in European Parliament elections on May 25, prominent businessman Tsvetan Vassilev, a supporter of the ruling party, began trading accusations with Delyan Peevski, a prominent businessman and MP from the Turkish minority party. Anonymous text messages were broadcast claiming insolvency at Corporate Commercial Bank (K.T.B.), the fourth-largest bank in Bulgaria, which counts Vassilev as its largest shareholder. These rumours sparked withdrawals of $700 million, or 20 percent of the bank’s deposits, in a single week. Admirably, K.T.B. honoured the withdrawal requests. It then promptly requested that the B.N.B. place it in conservatorship to prevent a total collapse. Signs of a spreading crisis soon appeared when the central bank had to step in to prevent a run on First Investment Bank, an unrelated bank. The government and the B.N.B. pledged to conduct an independent audit and protect depositors and bondholders, even if it meant issuing new debt to guarantee the stability of the banking system. After all, the B.N.B.’s credibility was at stake: Only a few months earlier, it had given K.T.B. a clean bill of health in order to facilitate the purchase of a local subsidiary of a foreign bank.

International investors and local depositors largely saw this as a swift and effective reaction to what was likely a fabricated crisis. Then the real drama began. When an independent audit showed massive gaps in the banks’ records and malfeasance at multiple levels, the accusations reached a fever pitch. Vassilev called into question the reliability of the audit given the obvious discrepancy with the previous audit. The prosecutor general accused B.N.B. officials of complicity. Others demanded to know why government could not produce required duplicates of bank records. Each political party came up with a solution and then changed its position repeatedly, using the crisis to either score political points or cover up misdeeds. What began as an easily containable problem has turned into a political circus. All the while, K.T.B.’s doors remain closed, and depositors and creditors alike are left in the dark. This mismanagement has called into question whether Bulgaria has the basic political and institutional maturity to stabilize itself in the face of a crisis. The country is in danger of needlessly allowing its fourth-largest bank to collapse. The lack of transparency is stunning.

Politicians created this problem, and they must fix it. Unfortunately, this is complicated by the fact that a snap election is scheduled for October. The ruling coalition collapsed earlier this month, and in its place emerged a shifting and loose alliance made up of parties from the last government and the opposition. Everything is being handled behind closed doors. The problem is easy to solve at this early stage, but will take the same sort of decisive action as was necessary in 1997. And the good news is, the latest B.N.B. audit of K.T.B, released on July 31, showed a healthy bank with more than $4.5bn in assets.  There are two routes that would immediately restore confidence. First, the government or shareholders could provide the necessary capital backstop and depositors’ insurance to ensure that customers and creditors are protected, allowing the bank to promptly reopen without fears of a run or lawsuits. The second route would be to move the healthy assets and liabilities to a “good bank,” which would be promptly reopened, and to isolate the alleged “bad” loans and business activities to be dealt with through the full force of the law. Failure to take one of these routes will make it clear that Bulgaria is not a safe place to invest. If all it takes to destroy a bank, default on creditors, and wipe out depositors is a text message, then years of institution building, democratic consolidation, and EU-led rule-of-law programs are for naught. Investors will think twice about all aspects of business in what was an enticing growth market only a few weeks ago. Politicians in Bulgaria must put aside short-term gains and petty differences and act together to swiftly and resolutely control this crisis before it takes down the country, and them along with it.

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Troubled Bulgaria names law professor as interim prime minister

A Bulgarian law professor and former Socialist politician has been named caretaker prime minister until the next election, as the Balkan state grapples with the fallout from its worst banking crisis since the 1990s. Georgi Bliznashki (57) took over yesterday as prime minister while Rumen Porozhanov (49), a former senior civil servant, will be finance minister, President Rosen Plevneliev said in a televised statement to the nation. The interim government follows the resignation of the Socialist-led coalition at the end of July, paving the way for a snap election on October 5th, the second in less than two years. Mr Bliznashki inherits a raft of problems. In the past year, Bulgaria has struggled with sluggish economic growth, months of street protests against corruption, a diplomatic dispute over the Russian-led South Stream pipeline, deadly floods and a sovereign credit rating downgrade in June. Most pressing is the fate of Corporate Commercial Bank (Corpbank), Bulgaria’s fourth largest lender, which was hit by a run on deposits in June. It remains shut pending a full audit ordered by the central bank.

Efforts by the outgoing government to rescue the lender were scuttled by parliament last month and there is no agreement yet on to what extent the bank’s depositors and bondholders will be protected in a possible state rescue. Making matter worse, politicians on Monday blocked a proposal for the interim government to raise new debt that could have been used to rescue Corpbank, limiting Mr Bliznashki’s options to solve the crisis. Corpbank’s problems have put renewed scrutiny on the investment climate in Bulgaria, the European Union’s poorest member state and one of its most corrupt. Holders of dollar-denominated bonds, which mature on Friday, may sue the government if they do not get their money back. The interim government will get the ball rolling for Bulgaria to join the EU’s banking union, work to unfreeze blocked EU aid and prepare a revision plan for the budget, Mr Plevneliev said. The president had appealed to parliament to allow his government to raise new debt and make changes to the budget, warning that a failure to do so would hamper his administration and risked hurting the economy.

The debt could also have been used to pay workers at state-run construction projects and pay fines to Brussels in order to unfreeze EU aid programmes. Mr Bliznashki was formerly a senior member of the Socialist Party but was kicked out earlier this year after he openly endorsed an anti-government, anti-corruption student occupation of Sofia University. An outspoken critic of the outgoing coalition, Mr Bliznashki also drew fire from his party by becoming the head of a committee that collected over 560,000 signatures to support an initiative by the president for voting reform. Mr Porozhanov has held various positions at the finance ministry and was also on the supervisory board of the state-controlled Bulgarian Development Bank until last month – one of two institutions invited to help rescue Corpbank. Mr Bliznashki will also have to decide whether to approve an agreement with Westinghouse Electric Company – signed by the outgoing government – that enables the construction of a new nuclear reactor estimated to cost €3.7 billion. The agreement would help Bulgaria to reduce its energy dependence on Russia at a time of increased tensions between Moscow and Brussels over Ukraine. Bulgaria at present is one of five EU states totally dependent on Russia for nuclear fuel. The main opposition GERB party, which had ruled the formerly communist country until it was brought down by street protests in February 2013, is tipped to win the October election.

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Bulgaria outgoing health minister holds closing press conference

Bulgarian outgoing Minister of Health, Tanya Andreeva, held a closing press conference on Monday.
The closing press conference was also attended by outgoing deputy ministers Dr Boyko Penkov and Professor Chavdar Slavov. Minister Andreeva commented on the work done by the ministry in the frames of her mandate, the needed reform in the healthcare sector, the emergency medical aid service, and other related issues. “Reform in the healthcare sector will not happen even if we have a stable parliament,” said outgoing Minister Andreeva. “Much has been spoken about this reform over the past year. However, no one explained what one means with this term reform.  There is a need of legislation and financial resource. This reform will not happen in the next few years, even if Bulgaria has a stable parliament because there is no financial resource to launch it,” Ms Andreeva remarked.
In her words, there is a need of restructuring of the hospitals’ network in the country, as well as of stable emergency medical aid.

“There was 10% increase of the salaries in the emergency medical aid service, while there was a 20% increase in the psychiatric sector, since the start of the year,” Tanya Andreeva said. “This is what the National Health Insurance Fund (NHIF) is for it. Work on the elaboration of a new legislative framework has been started. We also worked out a set of methods on its establishment, as well as a model. It was tested in Kardzhali, Kyustendil and Leven,” Dr Andreeva said further.  The outgoing minister said further that 32 emergency medical aid centres would be renewed and renovated, while two new centres would be built.  Ms Andreeva also informed that 58 new ambulanced had been purchased and pointed at the first helicopter for medical purposes. “First training course for paramedics and medical assistants is to start in September,” the outgoing minister said. “As of 2015 the number of trained paramedics and assistants will be set under an agreement with the municipalities.  The 150 emergency phone number of medical assistance will be restored. There is a delay with the 112 emergency number, since they are the first to get the signal and then have to redirect it to the dispatchers and in addition the people servicing the hotline are not medical experts,” she said further.

Dr Andreeva remarked that the maternity healthcare was a priority. “Despite the serious demographic crisis, we have 400 more newborns reported. The birth rate has been decreasing since 2010 but I hope that there will be an upturn,” she said. “As far as the crisis in the municipal healthcare is concerned, more than 17 medical establishments closed doors. We work well with the mayors. The criteria were updated,” Andreeva remarked. “If I have to give an evaluation to myself, it will be lower than the deserved,” she said. “There was not a single day to be empty at the Ministry of Health. I worked very well with the health organisations,” Dr Andreeva remarked.  In her words, the minister cannot do anything on her on his own, if there is no support from the sector. “I am going to be a physical person as of Wednesday,” the outgoing minister remarked. “I am not satisfied with the financial security of the emergency medical aid. We set to its modernisation and development first. The telemedicine will be a fact in the new ambulances,” the outgoing minister remarked, adding that Bulgaria was very conservative in terms of changes.  “I wish the next minister a full mandate, even two, with a majority at parliament that backs every step he or she makes,” Ms Andreeva said.