EU Approves State Aid for Bulgarian Banks as Lender Targeted

Jun 30, 2014 12:25 pm ET

(Updates analyst comments starting in fifth paragraph.)

June 30 (Bloomberg) -- The European Union gave Bulgaria authority to provide 3.3 billion lev ($2.3 billion) in state aid for lenders after police there arrested men they said triggered a run on deposits of the third-largest bank.

The central bank overcame a run on deposits caused by an “organized criminal attack” against several banks, it said in a statement today. Earlier, queues formed outside some Sofia branches of First Investment Bank AD, which paid 800 million lev to clients on June 27. Bulgaria asked the European Commission to support the credit line a week after the central bank put fourth-largest Corporate Commercial Bank AD under administration after a big depositor withdrew funds.

“Last week, it transpired that certain individuals have been targeting the third-largest bank, urging customers to withdraw their deposits,” the European Commission said in an e- mailed statement. “This created concerns about the liquidity of the bank in question and risked spilling over to some other institutions, despite the fact that the Bulgarian banking system is well capitalized and has high levels of liquidity.”

Bulgaria’s ruling Socialists are under pressure to resign following a poor showing in European Parliament elections on May 25. The government, which took office a year ago, is 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 early elections yesterday for Oct. 5 and will dissolve Parliament Aug. 6.

Stocks Rise

“The scheme provides the necessary and proportionate liquidity in the wake of external, non-bank related events,” the Commission said of the state support.

Bulgarian stocks climbed the most in the world, led by First Investment Bank. The bank jumped 27 percent, the most since July 2007, to 3.6 lev at the close in Sofia, recovering from a five-month low. The Sofix index rose 5.8 percent, the most in almost five years and the biggest gain among 93 benchmarks tracked by Bloomberg.

The country of 7.5 million, which is the European Union’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 countries for failing to curb corruption among senior government officials and sever their links with organized crime.

Crime, Realignment

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 today in an e-mail.

While Bulgarian equities rebounded, investor sentiment toward sovereign debt has soured. The yield on the government’s euro-denominated bonds maturing in July 2017 rose five basis points, or 0.05 percentage point, to a more than four-month high of 1.72 percent.

Bulgarian prosecutors started the 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 men used mobile phone messages, e-mail and social media to spread rumors prompting people to withdraw bank deposits, the agency said.

Minister’s Plea

The banking crisis has stoked tensions on the political scene. Speaking on National Television on June 28, Finance Minister Petar Chobanov accused former prime minister and opposition Gerb party leader Boiko Borissov of causing “panic” by making “uncontrollable and incompetent statements on such sensitive subjects as the financial security.”

Chobanov was responding to a statement made by Borissov, who was toppled from power by street protests 14 months ago, in a June 28 television interview that Bulgaria’s “finances and bank system are in a catastrophic state as a result of this government’s rule.”

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 today.

The central bank said it will use cash from the Bulgarian Development Bank and the Deposit Guarantee Fund, both state- owned, to recapitalize Corporate Bank. Corporate Bank and FIB account for 18.5 percent of assets held by lenders, according to the central bank.

Bank Stability

Bulgaria has built up a fiscal reserve that increased to 6 billion lev at the end of May, from 4 billion lev in May 2013, when Prime Minister Plamen Oresharski’s cabinet took office, according to the Finance Ministry. Bulgaria’s foreign reserves were 13.8 billion euros ($18.8 billion) at the end of May, according to the central bank.

The banking system is 70 percent-owned by foreign lenders, including UniCredit SpA and Raiffeisen Bank International AG. 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.

Plevneliev met yesterday with the leaders of the country’s biggest political parties and central bank Governor Ivan Iskrov, who agreed “to secure all necessary means and actions to guarantee banks’ stability.”

Plevneliev 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 be covered by foreign exchange reserves.

No Contagion

“Some countries’ financial sectors are still fragile and problems are likely to flare up from time to time,” Capital Economics Ltd. in London said in an e-mailed note. “There hasn’t been any contagion to the rest of the region and we don’t think there will be.”

Last week, Bulgaria sold 1.49 billion euros of 10-year Eurobonds with a record-low 2.95 percent annual coupon in an auction where bids were more than double the amount on sale, the Finance Ministry said June 27. The country’s public debt, at 18 percent of gross domestic product, is far below the euro-area average of 96 percent.