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Categorized | Banks

Fears of Bulgarian bank crisis ease


Posted on June 30, 2014

Bulgarian President Rosen Plevneliev (C) speaks to Bulgarian Prime Minister Plamen Oresharski (centre R), political party leaders, the finance minister and central bank chiefs in this handout image released by the Bulgarian Presidency Press Office on June 29, 2014. Bulgaria's state institutions and political parties fully support efforts to stabilize the banking system and Bulgarians have no reason to fear for their savings, President Rosen Plevneliev said on Sunday. REUTERS/Bulgarian Presidency Press Office/Handout via Reuters (BULGARIA - Tags: POLITICS BUSINESS) ATTENTION EDITORS - THIS PICTURE WAS PROVIDED BY A THIRD PARTY. REUTERS IS UNABLE TO INDEPENDENTLY VERIFY THE AUTHENTICITY, CONTENT, LOCATION OR DATE OF THIS IMAGE. THIS PICTURE IS DISTRIBUTED EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS. NO SALES. NO ARCHIVES. FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS©Reuters

Bulgarian President Rosen Plevneliev , centre, hosts talks on June 29, 2014

Bulgaria’s banking system appeared to be stabilising late on Monday after the EU approved a Lev3.3bn (€1.7bn) emergency credit line from the central bank, following runs on two of the country’s biggest lenders in a week.

The liquidity move followed assurances from political leaders over the weekend that Bulgarians’ savings were safe and the banking system was stable and well capitalised, in spite of a speculative attack involving anonymous text messages and emails.

    The Bulgarian National Bank had warned on Friday of an “attempt to destabilise the state through an organised attack against Bulgarian banks”, as Bulgarians withdrew Lev800m from branches of First Investment Bank, the country’s third-biggest lender.

    Those withdrawals came just days after a run on Corporate Commercial Bank, the country’s fourth largest bank.

    Six people were arrested over the weekend, accused of sending electronic warnings that FIB was about to collapse; two were indicted on Monday for spreading false information on banks.

    Rosen Plevneliev, Bulgaria’s president, also announced late on Sunday that after talks with party leaders he would dissolve parliament by July 25 and then name a caretaker administration, ahead of early elections called for October 5. That move helped ease political uncertainty that had fuelled the crisis.

    Bank shares recovered sharply on Monday after news of the central bank credit line. The European Commission also noted that the country’s bank sector was “well capitalised and has high levels of liquidity compared to its peers in other member states”.

    “The situation has stabilised over the course of the day,” said Alex Bebov, managing director at Balkan Advisory Company, a Sofia-based brokerage.

    “This was a very different style of banking crisis than, for example, in Slovenia, where you had a lot of fundamentals. Here it was much more an issue of cyber attacks, via SMS [text messages] and the internet.”

    Two senior Bulgarian bankers said the BNB had on Monday raised Lev1.3bn through a special bond issue covered by 10 Sofia banks – mainly foreign institutions – to provide emergency liquidity support to FIB and any other Bulgarian banks that might need it. The bond has a maturity of five months and was priced to yield around 2 per cent.

    The BNB was said to believe this would be enough to cover any Bulgarian bank’s needs, as the situation began to calm, and that normal banking conditions would resume in the coming days. Bankers said the Lev3.3bn credit line agreed with the commission was the maximum acceptable amount, but was seen as unlikely to be necessary.

    Queues were seen outside some FIB branches on Monday morning, and while these were much smaller than on Friday, the situation in the financial sector was still “edgy”, a Sofia-based banker said.

    “There are no signs of panic but some companies are transferring funds out of lev and into euros, and others are moving deposits to foreign banks operating in Sofia,” this banker said.

    Other banking insiders confirmed that Bulgarians had been taking deposits out of domestic institutions and depositing them with foreign-owned ones, which account for about 70 per cent of Bulgaria’s banking system by assets.

    The biggest Bulgarian bank by assets is owned by Italy’s UniCredit, which expanded in the country with the takeover of Bulbank in 2000 and now has a 15 per cent market share. It has €6.6bn of assets, 230 branches and 4,000 employees in the country.

    “UniCredit Bulbank is operating in normal mode,” the Italian-owned bank said in a statement on Monday.

    Bulgaria’s second-biggest bank, DSK, is also foreign-owned, acquired by Hungary’s OTP when it was privatised in 2003. Austria’s Raiffeisen Bank is the sixth-biggest bank by assets, with €3.2bn of assets and 168 branches. Other foreign banks with Bulgarian operations include France’s Société Générale, and Greece’s Alpha Bank and Eurobank.

    Despite strong fiscal management and a stable exchange rate backed by a currency board arrangement pegging the lev to the euro, Bulgaria is criticised by EU partners for weak governance resulting from close ties between business, politicians and the judiciary.

    Gillian Edgeworth, a senior economist at UniCredit, said in a note on Monday: “Repeated freezing of EU funds provides evidence of underlying issues with corruption at a time when the economy lacks investment.

    Additional reporting by Theodor Troev in Sofia

    ***

    Risk seen to economy but not peg

    The regime that pegs the Bulgarian lev at a fixed rate against the euro – set up after the devastating hyperinflation and currency crisis of 1996 – is often credited with providing the basis for the economy’s subsequent stability, writes Delphine Strauss.

    Supported by fiscal policy and a large pool of foreign exchange reserves, it proved more resilient than similar regimes in the Balkan states during the turmoil of the global financial crisis.

    Analysts see no immediate threat to the peg from the recent rumour-fuelled bout of instability, as foreign exchange reserves of €13.8bn more than cover the value of lev in circulation. The lev is currently pegged at 1.9558 to the euro, the rate it has been since the creation of the currency board nearly two decades ago.

    Bulgaria’s president described the currency arrangement on Monday as “unshakeable” in a bid to calm fears about the country’s banks. The bigger risk, economists say, is of further damage to an already stuttering economy.

    One peculiarity of the Bulgarian currency board is that it allows the central bank to act as a temporary lender of last resort to solvent banks.

    Simon Quijano-Evans, economist at Commerzbank, thinks the government’s decision to recapitalise banks through the Bulgarian Development Bank and Deposit Guarantee Fund is designed “to avoid any confusion about the currency board set-up” and to bolster its credibility.