Why Bulgaria is The Next Big Worry for Eurozone

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mandyjeancole
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Why Bulgaria is The Next Big Worry for Eurozone

Postby mandyjeancole » Fri Jun 11, 2010 11:40 am

There have since been mutterings about Belgium and even France. Last week there were jitters about Hungary. And now it's Bulgaria's turn.

Hang on, you say. Hungary and Bulgaria aren't even in the euro. Why should our continental cousins worry about them?

Well, there are plenty of reasons for the eurozone countries to worry about their neighbours to the east. Here's what's spooking them, and what it means for the euro...

Hungary and Bulgaria are worrying investors

Greece's troubles are almost old hat now for veteran eurozone watchers. That's because a whole string of other countries with dodgy finances is now giving the financial markets sleepless nights.

In a nutshell, investors who lent them money in happier days are worried they won't get their money back now that times are tougher.

That's bad enough for those with loads of cash tied up in the eurozone. But now those concerns are spreading beyond the single currency area, too.

There's always been an agenda to expand the eurozone. Several other countries were meant to join the single currency at some future stage, once they'd knocked their finances into shape. But even although these potential newcomers haven't yet met the EU criteria, they're still scaring the horses.

Last week, Hungary said it was facing a Greek-style debt crisis, as we mentioned in Monday's Money Morning. The Hungarian government later backtracked, saying things weren't so bad after all. But in the meantime the Hungarian forint plunged against the US dollar and sent shockwaves across other global markets.

Now Bulgaria is having its turn in the spotlight. Auditors from Eurostat – the EU's statistics office – are likely to be "parachuted in" to Bulgaria to cast a critical eye over the country's public sector accounts, says EU Economics and Monetary Commissioner Olli Rehn.

So what's going on? And why is this spooking the eurozone?

There are two main reasons.

Firstly, news that the EU's accountants have turned up on a country's doorstep can get the rumour mill working overtime. Ever since Greece admitted that Goldman Sachs had helped it fiddle its deficit numbers, everyone's on the alert for a repeat.

"The timing of Rehn's statement was unfortunate given the last week's focus on the veracity of historical budget data in Hungary, and comparisons made to Greece's chequered track record on the data quality front", says Timothy Ash at RBS. "The EC is eager to expose any potential skeletons in the fiscal cupboard, and Bulgaria seems to be next in line in this 'cleansing' process".

In other words, senior eurocrats want to make sure Bulgaria isn't cooking its books. And that's because of the second reason. There's a big debt problem in Bulgaria.

The irony is that government borrowing is fine. The annual budget deficit – how much the government is spending over and above what it receives in taxes – is forecast to be 'only' 3% this year. And the national debt – the government's total debt pile – is likely to be just 17% of GDP by the end of this year. That compares very favourably with the EU average of 80%, and well over 100% for Greece. So Bulgaria should be able to pay its interest bills for now.

The cause for concern lies elsewhere. Bulgaria has a total external debt/GDP ratio of around 108%. That means that as a group, Bulgarian citizens owe more than they produce each year.

And because Bulgaria's currency, the lev, is pegged to the euro, this creates a rather different problem to Hungary. As John Stepek explained on Monday, many European banks made euro loans to Hungarian homeowners. When the forint dives against the euro, payments shoot up and some borrowers can't service their debts.

In contrast, lenders to Bulgaria – including Hungarian banks, incidentally – have to cope with the same issue that eurozone countries such as Greece, Ireland and Spain are suffering.

Because Bulgaria is keeping the lev pegged to the euro, the country hasn't been able to devalue its way out of trouble. That means its exports simply haven't been able to compete on the world stage.

And that's "caused a brutal and extended recession", says Ash. Real GDP shrank by 5% in 2009, and fell a further 4% in the first quarter of 2010. Unemployment has doubled in the past year to just below 10%. The economy is likely to take a long time to turn around.

Even worse, Bulgaria's growth over the past four to five years has largely been driven by a credit-based property boom. That boom is over, leaving Bulgarians with lots of debts backed by properties which aren't worth what they paid for them. Throw in a weak economy and high unemployment, and the reality is that lots of those loans simply can't and won't be repaid.

Bulgaria's finance minister says he's not worried about the EU audit. And he has no reason to be. But European banks who've lent to the country's citizens should be worrying about the risks that all that external debt poses. It's yet another potential danger to their balance sheets. It's likely to require more asset write-downs. And they've plenty of dodgy debt in their own countries to sort out without having to fret about the likes of Bulgaria.

Add it all up, and it's yet another nail in the euro's coffin. Because if European banks suffer another crisis, their governments will be under pressure to bail them out again. That means even heavier public sector debts, weaker economies and possibly even money printing, which in turn means a weaker currency.

Novinite news today.

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Postby gimlet » Fri Jun 11, 2010 12:07 pm

The Banking system is seizing up again just as it did two years ago. The banks don't trust each other and they know that the last two years have been wasted in that the system is still overwhelmed by debt that is going bad all the time as debts fall due and asset values fall or are found to be non-existent. The only difference now is that national governments are bust as well.

If anyone can suggest a way that the Bulgarian economy can expect to recover within the EU I should be interested to hear it. My only suggestion is re-opening the uranium mines :D

June 09, 2010, 1:40 PM EDT
Credit-default swaps on Bulgarian five-year debt rose 9 basis points today to 384.5, according to CMA at 5:25 p.m. in London.
http://www.businessweek.com/news/2010-0 ... ate3-.html

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Postby scot47 » Fri Jun 11, 2010 12:14 pm

Iran might be persuaded to buy some of that uranium.

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Postby mandyjeancole » Fri Jun 11, 2010 12:22 pm

Short term UN pegging the lev from the euro and letting it float looks like the answer to me.. that way Bulgaria will have full control of its own destiny & it can rejoin the club at a later date once its got its finances in order.

Long term..my own personal view is.. what has Bulgaria got to offer the union ? I have thought long & hard on this one & i keep coming up with the same answer & that is Not-A-Lot.

Quiet simply if you were running a club would you want it as a member ? Answers on a postcard please addressed to Boyko Borisov. MJC

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Re: Why Bulgaria is The Next Big Worry for Eurozone

Postby Simonita » Fri Jun 11, 2010 1:57 pm

[quote="mandyjeancole"]
Because Bulgaria is keeping the lev pegged to the euro, the country hasn't been able to devalue its way out of trouble. That means its exports simply haven't been able to compete on the world stage.[unquote]

But devaluation of the Euro, and therefore by extension the Lev, is exactly what is going on. After the phenomenal success of the Euro is its first ten years, it had realistically become overvalued. The current readjustment will boost Eurozone exports and create the conditions necessary to sustain the recovery. Its the same trick that Gordon Brown tried (unsuccessfully) when he allowed the pound to fall. Unlike the UK, the Eurozone (well, Germany) has the industrial competitiveness to reap the benefits.

Because of the peg, a devaluation of the Euro could also be good news for Bulgaria, but only of course if it sells outside the Eurozone. Traditionally, Bulgaria has been very good at this, but trade with two key partners Serbia and Iraq was destroyed at a stroke by US/NATO sanctions and attacks. Bulgaria never received compensation for this loss.

Iran could be a useful trading partner (although not for uranium!), but again sanctions are likely to hinder progress.

Devaluation of small currencies can only buy short-term benefits, and then only if conditions exist to "cash in" - which is why Gordon's plan went awry. Its easy to forget how many Italian Lira, Spanish Pesetas, Belgian Francs etc, etc there were to the pound before the Euro. French Francs were just wallpaper until they knocked two zeros off the currency in the 1960's. Repeated devaluation just leads to junk currency, and is bad news for savers, investors, pensioners etc. Bulgaria would be no exception.

The Euro, like the Dollar, is big enough to look after itself. The lev and pound? - doubtful.

As to what Bulgaria offers the EU - 8 million more customers in the single market, plus the opportunity to substantially improve communications and reduce transport costs to new markets in Turkey and the Middle East. That's not counting the fact that Bulgaria (like all EU members) has had to renounce any claims to the territory of its neighbours thus helping to maintain peace in Europe.

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Postby Tiarnan » Fri Jun 11, 2010 2:05 pm

Quiet simply if you were running a club would you want it as a member ? Answers on a postcard please addressed to Boyko Borisov. MJC[/quote]


On the other hand if I thought that Bulgaria as a country would,nt be allowed into a club I was running I don,t think I,d want to live there either. I,d be off to a country I would let into my club.

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Postby scot47 » Fri Jun 11, 2010 2:48 pm

Why worry - you are not going to change it ! It is a bit like worrying over the weather or anything else over which you have no control !

"What's the use of worrying,
It never was worth while.............."

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Postby Oscar » Fri Jun 11, 2010 4:14 pm

http://www.bbc.co.uk/blogs/thereporters ... _euro.html

another article about the problems in the Eurozone,which may or may not eventually begin to affect Bulgaria.

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Postby mandyjeancole » Fri Jun 11, 2010 4:28 pm

The six-member board, chaired by former French Prime Minister Dominique de Villepin, says that without strategic direction and clear priorities on issues like security and energy, the Bulgarian state could face populist revolts. And that instability "could undo the ties between the E.U. and Bulgaria, prompting a shift toward Russian political and economic interests."

The two reports paint a portrait of a country stuck at the bottom of the class just 3½ years after it joined the E.U. Bulgaria's lack of progress is all the more glaring given the initial assumptions, in both Brussels and Sofia, that E.U. accession would lock in the reform process, pulling Bulgaria into the European mainstream. But the country is still plagued by corruption, gangland violence and feeble law enforcement. The system's failings were all too visible earlier, when two men indicted for running a criminal mob involved in racketeering and extortion were freed on bail to run as candidates in the parliamentary elections.

The worlds richest Prime Minster Vladimir Putin who is running Russia from the sinister shadows would certainly welcome Bulgaria back with open arms.. like the Godfather welcoming the prodigal son What then of Bulgaria with its thirst for wholesale corruption ?.as they say its better the devil you know.?...In my opinion Bulgaria s chances of remaining a fully paid up European member ensconced in western ideals Stands about as much hope as someone seeing a Israeli newspaper seller on a street corner of downtown Riyadh. MJC

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Postby brianj42 » Fri Jun 11, 2010 4:46 pm

mandyjeancole wrote:
Quiet simply if you were running a club would you want it as a member ?


Wouldn't let it in the club, but it would make a crackin bouncer :D


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