Greek Malaise Means Gain for Bulgaria as Firms Seek Refuge

Bulgaria is the European Union’s poorest country. For Iosif Komninakidis, it is a haven from the debt crisis in his native Greece that has cost his jeans factory 30 percent of its business.

Staff Jeans & Co.’s Intex has a sewing plant in Rakovski, Bulgaria, about 180 kilometers (111 miles) north of the border. It is one of more than 2,000 Greek companies operating in the former communist country, 40 percent of whom were registered this year, the National Revenue Agency in Sofia said.

“The Bulgarian operation costs much less than it would cost in Greece” because of lower taxes and wages, said Komninakidis, who is Intex’s chief executive officer. “Tax laws in Bulgaria are much simpler, clearer and more predictable.”

Bulgaria is attracting companies from Coca-Cola Hellenic Bottling Co. SA to Hellenic Petroleum SA (ELPE) as Greek Prime Minister George Papandreou’s is cutting spending and raising taxes, deepening a recession at home. Greece passed a record 78 billion-euro ($112.6 billion) austerity package to secure a second bailout from its international creditors as it struggles to cut the biggest debt burden in the euro region’s history.

Greece’s government debt may peak at 161 percent of gross domestic product next year and GDP may shrink more than 3.8 percent this year, the third year of contraction, after a 4.4 percent drop last year, according to the European Commission.

Unemployment was at a record 15.9 percent in the first quarter, while the jobless rate in the border area of eastern Macedonia and Thrace soared to 20.2 percent in May.

Loss of Confidence

Companies in Greece have little prospects to expand their business and sales after consumers lost confidence in an exit from the crisis, the Athens-based Foundation for Economic & Industrial Research said on Aug. 4. Eighty-percent of people in the foundation’s survey forecast a worsening of their personal financial situation in the next year, up from 76 percent in June, the survey showed.

The Bulgarian economy has a lot going for it. The corporate and personal income tax rates are at 10 percent, the lowest in the EU. Government debt is 18 percent of gross domestic product this year, the third lowest in the 27-nation bloc after Estonia and Luxembourg, compared with 158 percent for Greece, according to the European Commission.

Bulgaria, the EU’s poorest country as measured by per- capita GDP, ranks 51st among 183 economies on the Ease of Doing Business list compiled by the World Bank and the International Finance Corp., the same as last year. Greece slipped 12 places to 109th.

‘Overvalued’ Euro

“Greece is uncompetitive within the euro zone and it’s evident that Greek companies are moving into Bulgaria to escape that overvalued currency and to seek lower costs,” said Stuart Thomson, a fund manager at Glasgow-based Ignis Asset Management, which oversees $120 billion.

Papandreou is planning levies ranging from 1 percent to 5 percent on wages, higher taxes on restaurants and bars, heating- oil taxes and a lower tax-free threshold on the income tax to help shrink the budget deficit. Greece’s ASE Index plunged 34 percent this year, the third-worst performance in the world behind the Cypriot and Egyptian stock markets, as Bulgaria’s Sofix rose 1.3 percent.

Greeks in Bulgaria

Greek companies that operate in Bulgaria also include Fourlis Holdings SA, which holds the IKEA franchise for the region, and builders Ellaktor SA (ELLAKTOR) and Terna SA. Jumbo SA, Greece’s biggest toy retailer, opened four stores in Bulgaria. About 800 Greek companies registered in Bulgaria this year, according to the National Revenue Agency, most of them in Blagoevgrad, 70 kilometers from the Greek border.

“Most of the companies registered in Bulgaria this year did that to take advantage of lower taxes or just to buy a cheaper car or real estate,” said Panagiotis Koutsikos, chairman of the Athens-based Greek-Bulgarian Chamber of Commerce.

Greece’s investment in Bulgaria amounted to 7.63 billion euros between 2000 and 2009, about 5 percent of Greece’s total investment abroad for the nine years, according to Eurostat. Greece invested 160 million euros in Bulgaria in 2010, according to the central bank in the capital Sofia.

Bulgaria remains at risk because the euro region’s financial instability may scuttle its economic recovery, analysts say. Almost a third of the country’s banks are owned by Greek parents such as Piraeus Bank SA (TPEIR) and Alpha Bank SA.

Bulgarian growth slowed to 1.9 percent in the second quarter from a year earlier from 3.4 percent in the previous three months. The government’s estimate for this year is for growth of 3.6 percent and 4.1 percent for 2012.

Eastern Europe at Risk

Net foreign investment plummeted in the first half to 8 million euros from 532 million euros a year earlier as the Bulgarian units of international companies repaid loans to their parent companies abroad, according to the central bank.

Eastern Europe remains at “serious risk” from the financial instability in the euro region and the contagion risk is the highest in Greece’s Balkan neighbors, such as Bulgaria, the EBRD said in a report on July 22.

Intex’s Komniakidis, who employs 1,000 people at five Bulgarian plans, says it’s a risk worth taking while Staff Jeans is struggling to cope with 2 million euros of unpaid orders by bankrupt Greek clients.

“We try to keep afloat by cutting costs here,” Komniakidis said.

To contact the reporters on this story: Elizabeth Konstantinova at ekonstantino@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net; Balazs Penz at bpenz@bloomberg.net

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