Bulgaria’s central bank said it overcame an “organized criminal attack” against several banks after the European Union gave it authority to provide state aid to lenders following a run on deposits.
The European Commission yesterday approved Bulgaria’s extension of a 3.3 billion-lev ($2.3 billion) credit line after police there arrested men they said triggered a run on deposits of third-largest First Investment Bank AD. The bank paid 800 million lev in deposits to clients on June 27, a week after the regulator put Corporate Commercial Bank AD, the fourth-largest, under administration after a big depositor withdrew funds.
“The pressure caused by an organized criminal attack on some Bulgarian banks has been overcome,” the central bank in Sofia said in an e-mailed statement, citing bank data available by the end of yesterday. “Bulgarian banks are functioning normally as a result.”
Bulgaria’s ruling Socialists are fighting to keep the banking system stable as opposition politicians say the current leadership has brought the country to the brink of ruin. President Rosen Plevneliev called elections two days ago for Oct. 5, a full three years ahead of schedule, and will dissolve parliament Aug. 6.
Bulgaria asked the European Commission to support the credit line after “it transpired that certain individuals have been targeting the third-largest bank, urging customers to withdraw their deposits,” the EU’s executive arm said in an e-mailed statement yesterday.
First Investment Bank rose 6.7 percent to 3.84 lev per share at close in Sofia, after yesterday’s 27 percent jump, the biggest since July 2007. The Sofix (SOFIX) Index rose 2.4 percent to 564.38 after a 5.8 percent gain yesterday. The yield on the government’s euro-denominated bonds maturing in July 2017 fell seven basis points, or 0.07 percentage point, to 1.67 percent.
While the credit line “should stabilize the situation in the short run,” questions remain over political stability, Peter Attard Montalto, an emerging-market economist at Nomura Holdings Plc, said by e-mail.
The Balkan country of 7.5 million, the EU’s poorest state by economic output per capita, joined the 28-nation bloc in 2007 along with neighboring Romania. The EU has repeatedly criticized both nations for failing to curb corruption among senior government officials and sever their links with organized crime.
The two cases of bank runs “appear to fall into the same category, which evolved in the context of a larger realignment of political and business interests ahead of the early general elections,” Otilia Dhand, vice president of Teneo Intelligence in London, said by e-mail.
Bulgarian prosecutors started a pre-trial investigation of two of the seven men arrested last week on suspicion of spreading information aimed at destabilizing banks, the State Agency for National Security said on its website. The central bank submitted to Parliament yesterday a draft Penal Code amendment envisaging jail terms for people spreading misleading information about banks.
Bulgaria’s bank run was “not caused by underlying issues,” Bas Bakker, a division chief for central Europe at the International Monetary Fund, said at a news conference in Vienna today. “Bulgarian banks are well-capitalized and liquid.”
The crisis has stoked tensions on the political scene. Speaking on National Television on June 28, Finance Minister Petar Chobanov accused opposition Gerb party leader and former Prime Minister Boiko Borissov of causing “panic” by making “uncontrollable and incompetent statements on such sensitive subjects as financial security.”
Chobanov was responding to a June 28 statement from Borissov, who was toppled from power by anti-austerity street protests 14 months ago, that Bulgaria’s “finances and bank system are in a catastrophic state as a result of this government’s rule.”
Gerb spokeswoman Sevdalina Arnaudova didn’t respond to Bloomberg calls on her mobile phone.
The central bank said it will use cash from the state-owned Bulgarian Development Bank and the Deposit Guarantee Fund to recapitalize Corporate Bank. Together with FIB, the lenders account for 18.5 percent of total assets, according to the central bank.
Bulgaria’s Finance Ministry sold 1.23 billion lev in five-month notes in an extraordinary auction yesterday to finance the bank support, the ministry said in an e-mail today.
The sale “ensured the first tranche of the liquidity buffer against the speculative attacks against several banks” and “guaranteed the smooth operation of the banking industry,” the ministry said.
“It is business as usual since yesterday afternoon,” Ivailo Alexandrov, First Investment spokesman, said by phone today. “All branches throughout the country are working. There are no queues.”
Bulgaria’s public debt, at 18 percent of gross domestic product, is below the euro-area average of 96 percent. The country had a fiscal reserve of 6 billion lev at the end of May, according to the Finance Ministry.
The banking system is 70 percent-owned by foreign lenders, including UniCredit SpA (UCG) and Raiffeisen Bank International AG. (RBI) The share of non-performing loans was about 17 percent of the total, according to UniCredit. The banking system’s capital adequacy ratio was 20 percent on March 30, with a Tier 1 capital adequacy of 18 percent, according to central bank data.
UniCredit Bank Austria and Raiffeisen Bank International gained clients draining cash from the crisis-hit lenders, First Investment and Corporate Bank, Austrian central bank Governor Ewald Nowotny told reporters in Vienna.
Plevneliev has reiterated Bulgaria’s intention to keep its currency board system, which pegs the lev at a fixed rate to the euro and requires all lev in circulation to be covered by foreign-exchange reserves. He spoke after a meeting with the leaders of the biggest parties on June 29.
“The authorities have been very quick in their reaction, which is the most important step to keep confidence in the currency board,” Simon Quijano-Evans, head of emerging-market research at Commerzbank AG in London, said by e-mail.
To contact the reporter on this story: Elizabeth Konstantinova in Sofia at firstname.lastname@example.org