Nov. 10 (Bloomberg) -- Bulgaria will apply early next year to join the exchange-rate mechanism, the two-year currency stability test prior to euro adoption, and seek to switch to the common currency in 2013, Finance Minister Simeon Djankov said.

“We are going to apply to the ERM-2 as soon as possible, within a few months,” Djankov said in an interview in Brussels today. “To do that, we need to show Europe and the world that we can have the best fiscal discipline, the best fiscal outcome for 2009 in all of the European Union.”

Joining the ERM would bring the Balkan country, the poorest in the EU, closer to the euro region and the protection of the European Central Bank. Bulgaria and the Baltic states of Latvia, Estonia and Lithuania had to resist pressure to devalue their currencies as eastern Europe’s recession takes its toll.

Djankov, 39, a former World Bank chief economist, took over the Finance Ministry and became deputy premier in Prime Minister Boiko Borissov’s Cabinet following elections three months ago. The government plans to submit its convergence plan to the European Commission by the end of January and then apply for the ERM, he said.

Djankov hopes to offset a possible reluctance to admit Bulgaria into the ERM, stemming from the global crisis, by garnishing the application with a targeted balanced 2010 budget, the smallest 2009 deficit in the EU and laws overhauling the inefficient health-care and social-security systems.

‘Four Years’

“It will be sometime early next year,” he said. “And the process typically takes a year. From the start of the ERM-2 process, “we’re giving ourselves about four years. By the end of our mandate we should be able to be in the euro zone or close to it. So it will be 2013.”

The lev is already linked to the euro in a currency board that keeps the Bulgarian currency at 1.9558 to the euro. Joining the exchange-rate mechanism may allow the lev to fluctuate by as much as 15 percent around a central band, though the central bank has said it will leave the lev tightly pegged to the euro through the duration of the two years.

The EU’s eastern members, among the countries hardest hit by the global financial crisis, will see their euro-adoption plans complicated by the recession, Fitch Ratings said in an April 16 report. Its latest forecasts for euro adoption were 2015 for Bulgaria and Romania, 2014 for the Czech Republic, Hungary and Latvia and 2013 for Estonia, Lithuania and Poland.

To adopt the euro, candidates need to keep their budget deficits to within 3 percent of gross domestic product, debt to 60 percent of GDP and their 12-month average inflation rates to within 1.5 percentage points of the average inflation rate of the three EU nations with the slowest consumer-price growth.

‘Working at It’

Bulgaria ran a budget deficit in the last five months after eight years of surpluses as the previous government raised spending before July 5 elections and the recession eroded revenue. The International Monetary Fund forecast a shortfall of between 0.5 percent and 3.5 percent of GDP this year.

“For 2009 it’s quite difficult to get to a balanced budget but we are working at it every day,” Djankov said. “The government has to create a surplus to counterbalance that significant deficit. October was the first month that we balanced the budget. And in November and December our forecast is to run surpluses. I’m fairly confident that we’ll come very close to a balanced budget for this year.”

‘Least Risky’

Borissov’s government cut spending by 15 percent and mothballed infrastructure projects. It reformed the National Revenue Agency and the Customs Office to boost revenue by plugging loopholes in excise-tax collection.

“Now Bulgaria is perceived as the least risky in the region,” Djankov said. “This is due to the fiscal discipline the new government has shown from the first week. There’s no pressure on the currency board.”

Bulgaria, which joined the EU in 2007, had to abandon initial plans to join the ERM shortly after EU entry because of accelerating inflation and a record current-account deficit.

Credit-default swaps linked to Bulgarian five-year bonds dropped to 214.3 basis points today from this year’s high of 698.1 basis points on March 9, Bloomberg data show. The contracts are rising as perceptions of credit quality deteriorate.

Optimistic

Djankov said he is optimistic that Bulgaria’s economy will recover after shrinking 4.9 percent in the second quarter as investment and demand waned. It will keep contracting until the fourth quarter of next year, while Latvia and Lithuania will exit their recessions one quarter earlier, the European Commission said on Nov. 3.

“Bulgaria will exit the crisis on par with the rest of eastern Europe, or perhaps earlier because we don’t have fiscal imbalances and didn’t have to increase taxes,” Djankov said. “We have a fiscal policy that allows us to rebound quicker than most.” Bulgaria has the lowest personal and corporate income tax in the EU at 10 percent.

To contact the reporter on this story: Elizabeth Konstantinova in Sofia at ekonstantino@bloomberg.net

Last Updated: November 10, 2009 11:39 EST