Bulgaria’s European Problem
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Bulgaria’s European Problem

As Bulgaria struggles with its reliance on investment from the foundering economies of the eurozone and its own torpid capital markets, does the government have the firepower to combat the storm?

Bulgaria has a problem, and that problem is Europe. While Bulgaria isn’t a eurozone member state, its currency, the lev, is pegged to the euro, and eurozone members make up the bulk of its export market. While the entire EU is praying for a resolution to the situation in the eurozone, Bulgaria perhaps needs it more than most. Bulgaria’s growth over the last few years has relied on investment and support from other European states – the unstable atmosphere that has pervaded for the past four years has been a hindrance.

“The impact from the situation in the eurozone stems from the uncertainty it creates,” says Levon Hampartzoumian, chief executive of UniCredit Bulbank. “Appetite for investment is reduced – we need technical solutions to be implemented at the European level.”

The lack of foreign investment isn’t helping Bulgaria’s stagnant capital markets. Turnover on the Bulgarian Stock Exchange has fallen

 Financial account, annual data (EUR bn)

sharply: in February 2012 it came in at slightly under Lev6.5 million ($4.4 million), whereas in February 2007 it had been almost Lev103 million. Privatization of the remaining state-owned companies, particularly in energy, might also offer a welcome boost to the capital markets. As much as a quarter of Bulgaria Energy Holding – an entirely state-owned energy company that owns the Bulgarian energy grid among other things – could be up for sale. Former economy minister Traicho Traikov estimates that would raise as much as Lev1 billion.

There’s been controversy over the government’s economic policy: Simeon Djankov, minister of finance, has been reluctant to use external means to finance the repayment of a Bulgarian Eurobond set to mature in January 2013, favouring using internal methods of repayment instead. There’s been talk of issuing bonds domestically or using the Silver Fund – a state-managed pension fund – to buy securities.

Perhaps the biggest concern about Bulgaria’s banking sector is the number of large banks with parents in countries on the eurozone’s periphery – particularly Greece. Three of the country’s larger banks are Greek-owned: United Bulgarian Bank is a subsidiary of National Bank of Greece and Postbank is a subsidiary of Eurobank EFG. Piraeus Bank and Alpha Bank also have sizeable operations in Bulgaria.

However, if foreign inflows fail to resume – and the government fails to find some other method of kickstarting the capital markets – then the problems there could dwarf any concerns over the stability of a segment of the banking sector.

For an in-depth feature on the opportunities and challenges facing Bulgaria, stay tuned for Euromoney magazine's May issue.

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