VZCZCXRO5659
OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSF #0679/01 3011448
ZNY CCCCC ZZH
O 271448Z OCT 08
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5477
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000679 
 
SIPDIS 
 
E.O. 12958: DECL: 10/23/2018 
TAGS: ECON EFIN PGOB BU
SUBJECT: FISCAL DISCIPLINE KEEPS FINANCIAL CRISIS AT BAY, 
BUT BULGARIAN-OWNED BANKS ARE WEAK LINK 
 
Classified By: Ambassador Nancy McEldowney for reasons 1.5 (b) and (d). 
 
¶1. (C)  Summary:  The Bulgarian financial system's relative 
lack of sophistication, along with the Government's policy of 
fiscal discipline, are insulating the country from the 
current international financial crisis.  The global credit 
crunch will have an impact on the real economy, in terms of 
reduced FDI, access to credit, and lower growth, but these 
could also serve to mitigate Bulgaria's two key imbalances: 
the current account deficit and inflation.  Bulgaria's 
largely foreign-owned banking sector is well-capitalized and 
strong, but the Bulgarian-owned segment of this sector is the 
dark cloud on the economic horizon.  Turbulence in the 
banking sector, if it appears, will not be a direct result of 
the international financial crisis -- it will be home-grown. 
End Summary. 
 
¶2.  (C)  Foreign and domestic analysts, including from the 
EBRD, Central Bank, Ministry of Finance and leading banks are 
expressing confidence that Bulgaria will emerge from the 
current international financial crisis with lower growth, but 
otherwise largely unscathed.  Citing the Bulgarian financial 
system's relative lack of sophistication ("we don't use 
derivatives here"), Minister of Finance Plamen Oresharski 
told us the Bulgarian banking sector is well-insulated from 
the current crisis.  In addition, the Socialist-run 
government has been pursuing a policy of strict fiscal 
discipline, running surpluses of one to three percent for the 
past five years.  These surpluses have been accumulating in a 
fiscal reserve now totaling more than 10 billion leva (6.7 
billion USD).  This prudent fiscal policy will continue, as 
leaders from across the political spectrum agree that it is 
needed as a hedge against external shocks that might put 
pressure on the country's currency board, now it its 11th 
year. 
 
¶3.  (C)  The growth rates Bulgaria has enjoyed for the past 
seven years will undoubtedly take a hit.  This growth has 
been fueled by robust domestic demand and supported by easy 
credit and strong foreign direct investment (plus speculative 
bursts in an overheated property market, now ready for 
contraction.)  With the global financial crisis, FDI has 
already slowed (preliminary data shows FDI down 12 percent in 
the first eight months of 2008) and access to bank credit is 
tightening.  As a result, the Ministry of Economy reduced its 
2009 GDP estimate to between 4.7 to 5.5 percent compared to 
2008's estimated 6.5 percent growth.  Our financial 
interlocutors point out that the upside to this slowdown is 
an eventual expected decrease in the high current account 
deficit (21.5 percent of GDP in 2007) and a projected 
lowering of inflation.  At 11.6 percent in 2007, inflation is 
the only indicator preventing Bulgaria from joining ERM-II. 
 
¶4.  (C)  The foreign-owned segment of the Bulgarian banking 
sector is strong.  Nine of the top ten banks in Bulgaria are 
foreign-owned, and bankers have said money is still flowing 
from European parent banks but the cost of lending is higher. 
  The Bulgarian National Bank, which operates a currency 
board, has few levers at its discretion to inject liquidity 
into the market.  It has already decided to increase deposit 
guarantees to 50,000 Euro (up from 20,000 Euro).  Reluctant 
to decrease reserve requirements directly, the Central Bank 
has started to allow banks to count 50 percent of bank cash 
deposits held at the Central Bank into the basis upon which 
the deposit reserve requirement (currently 12 percent) is 
calculated.  This measure is good for 90 days, but it may be 
extended. 
 
¶5.  (C)  Comment:  While Bulgaria's relative lack of 
sophistication does insulate it somewhat from the current 
financial turbulence and fiscal discipline is serving the 
country well, there is a dark cloud on the horizon.  Large 
foreign investors who depend on syndicated loans say credit 
is tightening dramatically across Europe.  This will delay 
large infrastructure projects in Bulgaria.  The U.S. energy 
giant AES, the largest foreign investor in Bulgaria, says  it 
does not expect to be able to raise credit for several major 
Bulgarian projects for the next 11 months.  In addition, the 
Bulgarian-owned bank First Investment, the sixth largest bank 
in the country with a major retail presence, experienced a 
mini-run in May after liquidity rumors spread on the 
internet.  On September 23, the global credit rating agency 
Fitch revised its outlook on First Investment to negative, 
citing the current market environment.  Smaller 
Bulgarian-owned banks may also be at risk.  Several appear to 
be boutique entities created only to finance and launder 
projects of various Bulgarian oligarchs and well-connected 
businessmen.  With lax anti-money laundering oversight on the 
part of the Central Bank and other financial supervision 
 
SOFIA 00000679  002 OF 002 
 
 
entities, Bulgaria may find that it survives the current 
international financial crisis, only to fall victim to 
home-grown banking instability. 
McEldowney