Bulgaria Allure Tarnished as Bonds Slide on Bank Runs

Bond investors are weighing whether Bulgaria is doing enough to curb its banking crisis that erupted three months before a general election.

The yield on the sovereign Eurobonds maturing in July 2017 climbed to a four-month high yesterday as the cost to insure the Black Sea nation’s debt against default jumped to the most since 2012, according to data compiled by Bloomberg. Bulgarian police last week arrested seven people suspected of orchestrating runs on deposits at the third- and fourth-largest lenders.

Prime Minister Plamen Oresharski, who took office a year ago, is preparing for early elections on Oct. 5 while struggling to keep the banking system stable as opposition leaders say the government has brought Bulgaria to the brink of ruin. The European Union yesterday gave its poorest member authority to provide a 3.3 billion lev ($2.3 billion) credit line to lenders.

“The cash injection should help and effectively increase liquidity in the sector,” Arkadiusz Bogusz, chief investment officer at Ipopema Asset Management SA in Warsaw, who oversees $1 billion in fixed-income assets, said by e-mail yesterday. “There’s little point in trying to catch a falling knife. The situation must become clearer before we decide to buy.”

The rate on the sovereign’s 2017 euro-denominated note surged 28 basis points in June, the worst monthly performance in a year and taking the premium over comparable German securities to a seven-month high of 164 basis points. The yield dropped one basis point today to 1.69 percent by 4:11 p.m. in Sofia.

‘Criminal Attack’

Bulgaria’s central bank said yesterday it overcame an “organized criminal attack” against several banks, after First Investment Bank AD reported 800 million lev of cash withdrawals on June 27. A week earlier, the regulator seized Corporate Commercial Bank AD and pledged to increase its capital after the lender ran out of funds.

“The instability in Bulgaria’s banking sector is a symptom of deeper political and institutional weaknesses,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail today. “The hope is that early elections will produce a stronger government but the fact remains that Bulgaria suffers from a deeply fragmented and conflict-ridden political scene which bodes ill for much-needed structural reforms.”

Finance Minister Petar Chobanov called on politicians last week to refrain from verbal attacks on the banking industry in their campaigns. He accused former Prime Minister Boyko Borissov of causing “panic” by making “uncontrollable and incompetent statements” about the financial system.

Buying Opportunity

Sevdalina Arnaudova, a spokeswoman for Borissov’s Gerb party, didn’t respond to calls to her mobile phone seeking comment on the accusations.

CCB and FIB, both locally owned, account for 18.5 percent of banking assets in Bulgaria, while most of the industry is held by foreign companies including UniCredit SpA and Raiffeisen Bank International AG, central bank data show.

“We expect a rebound in the price quite quickly,” Peter Svoboda, a Vienna-based money manager who helps oversee $6.1 billion of fixed-income assets at Erste Sparinvest KAG, said by phone yesterday. The credit line represents “an opportunity to buy Bulgarian and other eastern European bonds,” he said.

Bulgaria has the “firepower to withstand more vulnerabilities in the banking sector, should they arrive” in part because of low indebtedness, according to Sergey Dergachev, a money manager at Union Investment Privatfonds GmbH in Frankfurt. The sovereign’s public debt will amount to 23 percent of gross domestic product at the end of 2014, among the lowest in the EU, European Commission estimates show.

‘More Volatility’

Worsening investor perceptions lifted credit-default swaps that protect Bulgarian bonds for five years by 24 basis points in June to 145 basis points, the highest since October 2012, according to CMA data. The CDS for neighboring Romania, which like Bulgaria is rated at Standard & Poor’s lowest investment grade BBB-, traded at 135 basis points yesterday.

The political and banking turmoil didn’t stop Bulgaria from selling its first Eurobonds in two years last week, taking advantage of increased global demand for higher-yielding assets. The government raised 1.49 billion euros ($2 billion) in the offering of debt due September 2024, priced to yield 3.06 percent, or 160 basis points above euro midswaps.

“The timing of the new issue was not perfect,” Gabriele Nopp-Rau, a money manager at Kepler Fonds in Linz, Austria, who bought the Bulgarian notes, said by e-mail yesterday. “Until the election in October, we might see more volatility, but spreads are at a fair level and will be tighter again without these uncertainties.”

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