Банкеръ Weekly

Briefs

GOVERNMENT BINDS THE BUDGET FULFILLMENT WITH LIBOR

Interest payments are of great importance to the budget fulfillment as they account for about 10% of its expenditures side. According to estimates for 2002, more than BGL1.1BN will be spent on payment of foreign and internal debt interest. About BGL812MN (USD387MN) of that amount will go to foreign creditors. But the exact amount of money for payment of interest depends on the six-month London interbank offered rate (LIBOR).Bulgaria was lucky in 2001 because in the first ten months of the year LIBOR went down from 6.24% to 2.53% - the lowest level since January 1992. But if next year LIBOR goes back to its January 2001 rate, the expenditures for payment of intrest projected in the budget for 2002 will increase and exceed the stipulated reserve, which is BGL230MN according to the Minister of Finance Milen Velchev. In that case the Government will either have to cut down the insufficient money for other spheres or should redraft the the budget, which will amount to a financial collapse.The described danger is not hypothetical, having in mind that even now the Finance Ministry is preparing schemes for its prevention. On October 29th Mr. Velchev admitted that the expenditures for intrerest payments in the 2002 budget have been calculated at the low LIBOR levels. He declined to specify the exact amount, but according to some sources the projected average annual rate is around 3 per cent. Asked by the BANKER weekly about the treasury's reserves for covering the additional expenidtures for intrest payments if LIBOR goes up, Mr. Velchev answered: The Ministry of Finance is ready to fix the inrerests to be paid throughout the year in order to avoid surprises. This will be done through the existing market instruments - forwards and futures. For example, we close a forward deal with a mediator, saying that LIBOR would be 3.5% in a year. If LIBOR goes up, the mediator will pay the difference between the real interest rate and the projected one. If LIBOR is lower than 3.5%, the difference will be paid by us.Mr. Velchev recommended journalists to address his deputy Katev for details on the schemes that could be applied for the realization of such financial operations. Mr. Katev, however, was not very loquacious after the publications that the Finance Ministry was purchasing Bulgarian Brady bonds. The Ministry itself annouced that these publications were not based on official information, and that its policy did not involve commenting on debt management operations or on the lack of such operations. However, this is normal practice worldwide. In fact, the former cabinet was also sticking to these priciples. But when the nominal amount of Brady bonds in BNB's bulletins goes down and no privatisation deals paid in Brady bonds have been effected, the only logical explanation is that they are purchased by the Government. And there is no need for it to either confirm or reject such information.But let's go back to the budget and forreign debt operations. Prinicpally, there is nothing wrong in closing deals for fixing the country's foreign debt interest. But such schemes bear a purely commercial risk that has to be very carefully assesseed.As Mr. Velchev explained, the forward operations which the Finance Ministry intends to close will be based on a purely commercial forecast about LIBOR's rates next year. It could prove right and then the Finance Ministry will gain money for covering the additional expenses. But the possibility for failure should not be ruled out. In such a case the treasury and more precisely the fiscal reserve will go down. The exact amount of the decrease will depend on the terms at which the forward deal has been closed.If the projections are correct, the money which the budget should pay to the foreign mediator in the operation, will be compensated by the saved expenses for interest payments (because of the lower LIBOR). But could there be guarantees that Mr. Velchev and Mr. Katev would structure the operation correctly? Their professional experience at international financial institutions such as Merrill Lynch and Daiva Bank could hardly be a sufficient guarantee.The former government (that of ex-premier Ivan Kostov) refrained from risky operations with Bulgaria's foreign debt. Its philosophy was that risks in such a policy would be much greater than the potential gains. The former deputy finance minister Plamen Oresharksy followed the creed that there should be no gambling with the foreign debt and no roulette players should be admitted to operations with it. The policy of Mr. Kostov's cabinet was fully backed by the BNB. Only once the government and the central bank ventured to close a large-scale deal with the foreign debt. In 1999 Bulgaria's liabilities to the International Bank for Investments and Cooperation, totalling USD980MN.The financiers from the National Movement Simeon II (NMSII) sharply criticized the former government for the passive (according to them) management of the foreign debt and promised to radically change the situation when they some to power. In fact, this was one of the few promises which the NMSII kept.

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