ECB Says Bulgarian Silver Fund Bill May Be Discriminatory

Bulgaria’s plans to invest 30 percent of a so-called Silver Fund in government securities may skew their yields and raise “an issue of indirect discrimination,” the European Central Bank said.

A draft law passed by the Cabinet on April 11 lifts the prohibition to invest the fund’s resources in securities issued by the Bulgarian government, municipalities and other issuers without requiring an investment-grade credit rating, while investment in debt securities issued by other countries requires such a rating, the ECB said on its website.

“This leads to unequal treatment of the different investment instruments, which could create competition and market distortions,” the ECB said in a comment, requested by the Bulgarian government. “It puts the government in a privileged position compared to other issuers” and “an issue of indirect discrimination arises that may lead to unjustified restrictions on the free movement of capital.”

The government decided to change the law regulating the fund where proceeds from state-asset sales are transfered to pay pensions after 2020, so it can be invested in financial instruments yielding higher returns, which can be used for state payments.

The Bulgarian central bank, where the fund is kept on deposits, opposes the move, saying it will threaten the country’s financial stability and urged the Cabinet to withdraw the draft before Parliamentary approval.

‘True State’

“The prices and yields of Bulgarian government securities will not reflect the true state of the Bulgarian economy and the position of the country’s public finances,” the ECB said. “In addition, some investors might stop participating in a debt securities market dominated by a public-sector fund, which is under the control of the issuer. This would reduce the depth and liquidity of this market.”

The current law allows for the fund’s assets, which total about 2 billion lev ($1.34 billion), to be invested in foreign bonds, while the government wants to diversify investment options with Bulgarian bonds.

It plans to increase the amount of assets invested in riskier securities by 10 percent each year, until it reaches 70 percent of the fund’s assets in 2016.

Fiscal Reserves

The Silver Fund is part of Bulgaria’s fiscal reserves and investing a part of it would erode the reserves and turn that part from an asset into a liability, the central bank said on April 11.

Bulgaria’s fiscal reserve fell to 3.8 billion lev at the end of February from 8 billion lev in July 2009, when Prime Minister’s Boiko Borissov’s administration took office.

Bulgaria, the European Union’s poorest country in terms of economic output per capita, weathered the global crisis without borrowing from international lenders. The government seeks to cut the budget gap to 1.35 percent of gross domestic product this year from 2.1 percent in 2011 to help contain fallout from the euro debt crisis.

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