site.btaBulgaria's Finances in 2014: Public Purse Is in the Red, But Banking System Is Stable Despite Corpbank Crisis

Bulgaria's Finances in 2014: Public Purse Is in the Red, But Banking System Is Stable Despite Corpbank Crisis

Sofia, December 16 (Mara Bareva of BTA) - The year 2014 has been
 one of upheaval in Bulgaria's financial and banking sectors.
After three changes of government and two successive updates of
the national budget, the country's public purse is bound to end
up in the red with an expected ratio of the government deficit
to GDP at 3.7 per cent. For the first time since Bulgaria's
financial system collapsed in 1996-1997 and five years after a
financial crisis hit the global economy, the country had its
first bank closure when Corpbank became inoperable on June 20.

The government of former Prime Minister Plamen Oresharski (May
2013 - August 2014) had intended to keep the government deficit
at no more than 1.8 per cent of GDP in 2014 and the plan was to
consolidate the national budget gradually in the coming years.
Oresharski's Finance Minister Petar Chobanov had projected that
the national economy would grow by at least 1.8 per cent in 2014
 and harmonized inflation would also stand at 1.8 per cent. But
already in the summer it became clear that public revenues would
 underperform by 995.6 million leva (as at the end of June). A
financial shortfall was reported in the National Health
Insurance Fund, and then physicians' organizations and the
health minister insisted that money should be urgently sought to
 ensure the normal functioning of the health care system.

Meanwhile, the government resigned at the end of July after
European Parliament elections were conducted in May. As an
outgoing Finance Minister, Petar Chobanov proposed that the
national budget be increased by 725 million leva so that the
next two governments - first a caretaker one and then a regular
one - could have enough resources to finance all planned
activities until the year's end. The proposed budget revision
implied that the government deficit would rise to 2.7 per cent
of GDP from the projected 1.8 per cent while VAT revenues would
fall by 500 million leva compared with the original projection.
But the National Assembly did not support Chobanov. The
lawmakers only increased the budget of the National Health
Insurance Fund by approving the transfer of 225 million leva
from the national budget while the budgets of all government
ministries were being cut down.

NATIONAL BUDGET EVENTUALLY UPDATED

The subsequent caretaker government (August-November 2014)
published new data on the implementation of the national budget
and predicted serious underperformance on the revenue side by
nearly 1.1 billion leva compared with the original projection
and an increase on the expenditure side partly due to the
suspension of two EU-backed operational programmes: on
environment and on regional development.

The Caretaker Minister of Finance, Roumen Porozhanov, announced
that he would have to prepare an update of the national budget
and propose it to the next regular government, which would need
to implement it as soon as possible in order to keep
ministerial-governed activities going. Porozhanov's proposal
assumed that the government deficit would rise to 3.6 per cent
of GDP.

After Vladislav Goranov took over as Finance Minister in early
November (in a government which had been very difficult to put
together, given the highly fragmented National Assembly), the
budget update proposal was reviewed in an attempt to minimize
expenses. Goranov warned, however, that if some expenses are
cancelled in 2014, they will reemerge as overdue liabilities in
2015. Subsequently, the budget update recognized that public
revenue underperformance would stand at 1.062 billion leva, or
1.3 per cent of projected GDP, and public expenses would
increase in the domains governed by individual ministries. The
latest projection is that the government deficit in 2014 will be
 3.7 per cent of GDP on a cash basis.

CORPBANK CRISIS

For the first time since Bulgaria's financial system collapsed
in 1996-1997, one of the country's major banks was closed down
in the summer of 2014. On June 20, Corporate Commercial Bank
(Corpbank), the fourth-biggest lender, notified the Bulgarian
National Bank (BNB, the central bank) that it had run out of
liquid assets and had stopped all payments and banking
operations. BNB put Corpbank under special supervision, making
all deposits in it inaccessible to their holders until December
4.

The liquidity crisis at Corpbank was preceded by checks in the
offices of its majority shareholder, Bromak EOOD. When Corpbank
was placed under special supervision, BNB Governor Ivan Iskrov
said that the lender's problems had begun after a media attack
from an anonymous source, but the bank was nevertheless stable.
Soon afterwards it transpired, however, that people in Corpbank
had performed actions inconsistent with good practice.

Already in the summer, an audit by independent consulting firms
Ernst & Young Audit OOD, Deloitte Bulgaria OOD and AFA OOD found
 a lack of information on 3.5 billion leva out of a total credit
 portfolio of 5.4 billion leva in Corpbank. BNB proposed a plan
to restructure Corpbank by implementing a "sick bank vs healthy
bank" scheme, according to which the lender's performing assets
and liabilities were to be transferred to its subsidiary Credit
Agricole Bulgaria, later renamed Victoria Commercial Bank. This
required a special law on Corpbank's restructuring. Such a law
was never adopted by the 42nd National Assembly, which was
disbanded in August.

Pursuant to effective national legislation, BNB commissioned a
comprehensive audit into the entire body of relevant banking
documentation which would enable the central bank to make a
well-founded decision on Corpbank's future. The comprehensive
audit found a 4.2 billion leva hole in the lender's capital,
which was even more than the most pessimistic estimates. On
November 6, in accordance with the Credit Institutions Act and
the BNB Act, the central bank withdrew Corpbank's banking
license. On December 4, in keeping with the law, the Bulgarian
Deposit Insurance Fund (BDIF) began paying out the Corpbank
deposits up to a limit of 100,000 euro (196,000 leva) each,
making them available again to their holders.

It turned out that the guaranteed amount of deposits in Corpbank
 was 3.6 billion leva, but BDIF had only 2.11 billion leva
available. The difference was financed by the updated national
budget. BDIF was offered a loan of up to 2 billion leva from the
 central executive budget for a period of up to 5.5 years at an
interest rate of 2.95 per cent.

Back in the summer, shortly after Corpbank went under special
supervision, there was also another panic run at First
Investment Bank (Fibank). After anxious depositors were
withdrawing their money for about a week, the government turned
to the European Commission for help and the Commission allowed
liquidity support to be provided to Fibank. Explaining the
difference between the cases of Fibank and Corpbank, the
government and BNB said that the European Commission can permit
state aid to banks, provided that they are not experiencing a
capital deficit but only need a liquidity boost.

BANKING SYSTEM IS STABLE

Despite the fact that Corpbank has been delicensed and its
depositors are still unable to get much of their money back,
overall, the money held by households on deposit in Bulgaria's
banks has increased further and the national banking system is
basically stable and exceedingly liquid. The conclusion was
repeated in separate year-end reviews by BNB Governor Ivan
Iskrov and the leaders of the country's largest banks. Official
BNB estimates show that deposits increased by 2.8 billion leva
(7.8 per cent) in October 2014 compared with October 2013, and
aside from Corpbank and its subsidiary Commercial Bank Victoria,
 the Bulgarian banking system boasts excellent results this
year: the total capital adequacy ratio is 22.16 per cent
compared with a required EU minimum of 8 per cent, and the ratio
 of liquid assets to liabilities is 29.75 per cent as at
October. The balance sheet value of unserviced loans overdue
more than 90 days is 10.62 per cent as at end-October. The
banking system continues to make profit and is expected to
record a positive financial result of 700 million leva in 2014.