Банкеръ Weekly



The active management of Bulgaria's foreign debt was among the promises in the National Movement Simeon II (NMSII) election campaign. It seems a suitable moment now to evaluate how the government led by Simeon Saxe-Coburg-Gotha kept its word. There are many reasons to make the assessment: the report by the Ministry of Finance which the retired minister Milen Velchev made on July 28, 2005 on the work done for the past four years; the accusations by Plamen Oresharski, nominated for financial minister by the Bulgarian Socialist Party (BSP) and the Movement for Rights and Freedom (MRF), who said that 2002 deals for swapping Brady bonds for global securities cause losses to the treasury amounting to EUR100MN every six months; and the purchase of the last Brady bonds - the front loaded interest reduction bonds (FLIRBs) which was carried out on July 29, 2005.Statistical data show that during the mandate of the retired government of Simeon Saxe-Coburg-Gotha, thanks mostly to the efforts of the Finance Minister Milen Velchev and his deputy till 2004 Krassimir Katev, the country's foreign debt has fallen by slightly more than EUR3.6BN. It's an impressive amount, especially considering that at the end of 2001 it amounted to EUR9.67BN and at the end of May 2005 - to EUR5.57BN direct obligations and EUR494.4MN state-guaranteed debt. Further EUR492.8MN (USD607.6MN) was deducted from that amount as the application for purchasing all remaining FLIRBs at par value announced in early June was implemented. In fact, this is the last package of Bulgarian Brady bonds that remained after a series of swaps and purchases. In a three-year period they helped the government of Simeon Saxe-Coburg-Gotha to destroy the bonds on the debt to the London Club creditor banks which was restructured in June 1994. It happened in five stages. In March 2002, the government exchanged collateralised discount bonds (DISCs) and interest arrears bonds (IABs) worth USD1.33BN for global securities. The same transaction was repeated in the summer of 2002 when Brady bonds worth USD866MN - mainly DISCs and FLIRBs, were thrown in the dust-bin. In July 2004 the government purchased all remaining discount bonds of USD774MN total par value. Six months later - on December 21, the Council of Ministers announced that on February 28, 2005 it was going to purchase at face value all remaining IABs. Their face value amounted to USD937.5MN. Now the last package of FLIRBs worth USD607.64MN is to be sold.The cleared Brady bondsworth USD4.5BN were replaced by new long-term bonds, however, which debt markets experts call global. Bulgaria made its debut on the market of this type of financial instruments on November 12, 2001, when Saxe-Coburg-Gotha's government launched an issue of EUR250MN face value which had a redemption term expiring on March 1, 2007 and a 7.25% annual interest.Global bonds worth EUR835.5MN and USD1.3BN issued by the Bulgarian state appeared on the international markets in March 2002 and September 2003 as a result of the redemption of Brady bonds worth USD2.1BN (by exchanging them for new bonds). The euro issue matures in 2013, when the whole principal will be paid off. It has a 7.5% annual interest rate. The dollar global bonds will be paid off in a pile again, but in 2015, and each year the government pays an 8.25% interest on them.The interest payments on these two issues became the bone of contention between the NMSII government and the opposition in the 39th National Assembly. Members of the United Democratic Forces claimed that interests on the bonds were too high and it would be much better for the cabinet to keep the Bradies that yield as much as the London interbank interest rate plus 13/16, instead of putting in circulation the new bonds with fixed 7.5% and 8.25% interests per year. The reason was that at the time of launching the global bonds the LIBOR fluctuated between 1.8% and 2.3% per annum and financial experts predicted it would not exceed 5% for a few years in a row, on the contrary to what Finance Minister Velchev claimed.Velchev's opponents have been the winners so faras the six-month LIBOR is 3.9% now and even though the Federal Reserve is expected to raise the interests additionally, experts forecast it will not go beyond 5% by the end of 2006. That enables Plamen Oresharski, nominated by the Coalition for Bulgaria for future financial minister and known as one of the direst foes of the global bonds issued by the NMSII government, to claim that they have made the state lose half a billion euro so far. Of course, Milen Velchev could respond by confronting figures for the reduction of the foreign debt and for the saving of payments on Brady bonds principals which Bulgaria would be obliged to make if it hadn't swapped them. Plamen Oresharski will probably pay attention to the fact thatglobal bonds do not compensate the paymentof principals, but simply delay it until 2013, when the state will have to pay EUR835.5MN in a pile on the first global bonds issue (used to replace the Brady bonds) and until 2015, when it will pay USD1.3BN on the second issue.It is difficult to judgewhich of the two sides in that dispute is rightbecause complex calculations with many assumptions and hypotheses are needed for proving their assertions. The question is if instead of issuing global bonds the Cabinet could had bought up the Bradies in the very beginning, as it did in 2004 and 2005. BNB's statistics show that that in the end of 2002 the Government's fiscal reserve was EUR1.7BN, and in 2003 it totalled EUR2BN. These funds did not allow the Government to spend EUR2.2BN within two years for repayment of the Brady bonds. That would expose at a risk the state's financial stability. For that reason, probably, the operations in question started in mid-2004 when the reserve already amounted to EUR2.5BN. The expenses for pre-term buying up of Bradies which seem huge at first sight, are not a problem at all currently as the Government had some EUR2.8BN on its accounts at the BNB in end-June. The executive power practically has a surplus of funds at its disposal and is therefore ready to spend some of them for reducing the foreign debt. For that reason the Cabinet in resignation of PM Simeon Saxe-Coburg-Gotha has made a decision for pre-term repayment of liabilities of EUR56MN to SACE - the Italian agency for insurance of export credits. Upon completion of that operation Bulgaria's direct external debt will be less than EUR5BN. If we add the state-guaranteed loans to it, it will total EUR5.5BN. The biggest remaining liabilities will be those under the three issues of long-term bonds, amounting to EUR2.6BN. Then comes the state's debt to the World Bank, totalling EUR978.1MN, followed by Bulgaria's liabilities of EUR840.7MN to the IMF. But while our debt to the IMF will be decreasing over the following years (because Bulgaria stopped drawing loans from that institution), the liabilities to the World Bank will be at the level around EUR1BN for a few more years. The reason is that the governments will yet be relying on financing from that institution to support various projects, connected with the restructuring of the judiciary and the state administration. The government is also indebted to the EU (EUR320MN), the European Investment Bank (EUR242.4MN), the creditor countries from the Paris Club (EUR170MN), Japan's EXIMBANK (EUR88.3MN), the European Bank for Reconstruction and Development (EUR20.4MN), and to other creditor banks (130MN). Servicing all these liabilities does not pose a problem to the state. The tendency, however, is that the debt will gradually be exchanged for government bond issues.

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