The Bulgarian government asked the European Commission on June 29 to authorize an extension of a credit line to the banking sector in order to respond to what it called speculative attacks over the past week. The European Commission, which requires members to obtain authorization before providing financial assistance to local companies, approved Bulgaria's request June 30. In a news release, the commission called the assistance package proportionate to guarantee liquidity and noted that the sector was well capitalized compared to other EU member states.
The crisis began June 20 when Bulgaria's fourth-largest lender, Corporate Commercial Bank, suffered a panic due to massive withdrawals in a matter of hours, causing the Bulgarian central bank to announce it would take control for three months. The crisis expanded June 27 when First Investment Bank, Bulgaria's third-largest lender, suffered a similar panic when depositors withdrew savings totaling 800 million lev, forcing the bank to close for the day. On June 30, the bank issued a statement saying it would open and return to normal operation.
Bulgarian President Rosen Plevneliev urged people to remain calm and denounced the run as a "criminal attack" against the banking sector. Over the weekend, authorities arrested at least five people in connection with the bank runs and accused them of disseminating SMS messages and emails with false data on the health of Bulgaria's banking sector.
Roughly 30 commercial banks operate in Bulgaria, and three-quarters of the banking system's assets are foreign-owned. Among foreign banks with operations in Bulgaria are Italy's UniCredit, Austria's Raiffeisen and Hungary's OTP Bank. Bulgaria has one of the lowest levels of debt in the European Union and an efficient central bank. The lev is also tied to the euro via a currency board first introduced in the mid-1990s after a financial crisis triggered hyperinflation and banking sector collapse.
While Bulgaria's banking sector is considered well-capitalized, its nonperforming loan ratio is expected to reach 18 percent this year and has been growing steadily since the beginning of the European crisis. Nonperforming loans, along with the country's slow economic growth rate, present a permanent risk to the sector. The current crisis has affected only locally owned banks so far, but an impact on foreign-owned banks cannot be discounted. Having so many banks in foreign hands means that Bulgarian banks could eventually obtain additional funds from their parent companies, though they in turn could find difficulty in managing nonperforming loans in countries including Romania, Greece and, most notably, Hungary.
A Strange Political Climate
Banking and political power are closely connected in Bulgaria. One of the most influential people in the country, entrepreneur Tzvetan Vassilev, is the main shareholder at Corporate Commercial Bank. Vassilev used to have close ties with lawmaker and media mogul Delyan Peevski from the Movement for Rights and Freedoms, a junior party in Bulgaria's ruling coalition. However, the two businessmen recently had a falling out.
Adding further complications is Bulgaria's ongoing dispute with the European Union over the South Stream natural gas pipeline. The European Union launched an infringement procedure against Sofia over the government's decision to proceed with construction plans for the pipeline. This led to a crisis within the coalition, with many criticizing the government's management of the issue. Under U.S. and EU pressure, Sofia announced June 8 that it would not move forward without an agreement with Brussels. Despite Bulgaria's current political instability, any government in Sofia will likely support construction of the pipeline and the substantial jobs and investment it would bring.
Amid these tensions, the leader of the ruling Bulgarian Socialist Party, Sergei Stanishev, called for the dissolution of Prime Minister Plamen Oresharski's government June 10. His statement echoed calls for the government's resignation by the Socialists' junior coalition partner, Movement for Rights and Freedoms, and the main opposition party, the center-right Citizens for European Development of Bulgaria.
The Bulgarian president responded June 29 by announcing the dissolution of parliament Aug. 6 followed by early elections Oct. 5. A caretaker government will preside over the transition. Elections will give Bulgaria the opportunity to regain some measure of stability, but the political situation in the country is likely to remain fragile. No single political party will be able to form a government on its own, and negotiations between the main parties to form a coalition will probably follow the elections. As a result, Bulgaria's political fragility will continue to have repercussions within its banking sector.
