Банкеръ Weekly

Briefs

Is BGN4.5BN Debt Scary?

The update of Bulgaria’s this year's budget passed first reading in plenary session on 18 November, Tuesday, after a 5-hour discussion. Statements will not surprise anyone - they were politically polarized, not actually paying much attention to the figures. Grounds "for" or "against" were sought with hidden political intent, and were not that much into financial and economic rationality. But one figure awoke terrible appetites of rhetoric, a significant part of which was ridiculous. This was the increase by 4.5 billion levs of the country’s debt.
"Is the new record-high debt of 4.5 billion levs too scary, which is at the heart of the need to revise the budget for this year?”

Absolutely not.

Why?

As first-graders already know the breakdown of the money as officially formulated is: 2 billion levs will go to the Deposit Guarantee Fund, 1 billion levs is to support the banking stability and 1.5 billion levs to cover the projected budget deficit for the year.

The first item - 2 billion levs for the Corporate Commercial Bank (CCB) – is a sum crucially important, because it takes the protection of depositors. It is important, however, to clarify the ways in which it will flow into the Deposit Guarantee Fund. This is loan money that the government will provide and then lend to the Guarantee Fund with an interest rate slightly higher than the interest rate that the government will pay for it. True, this loan will be paid back for any years, because banks have no means to return it more dynamically. Annually they invest in the fund about 300 million levs, which is about half of their profits. If the size of their contribution to the fund rises, some experts predict raising of interest rates on loans. Others argue that it is impossible to happen, because the market will is in excess of liquidity and good customers looking for loans are not that many. According to the political viewpoint, the increase of the amount of bank contributions to the Deposit Guarantee Fund would kill in the bud the timid attempts at economic growth in the country. However, citizens will not be the direct debtors in this budget item.

Is there a hidden buffer in the amount for the Deposit Guarantee Fund? Yes, definitely, because the exact amount that is necessary to ensure the deposits in CCB is publicly available and is 1.6 billion levs. Apart from this, as it became clear, the ceded amounts will not be recognized as guaranteed for up to 196,000 levs (100,000 euros) as well as the deposits concluded in "private negotiations." This means that the necessary alleged amount will be further cut down. So it is possible to finally remain with more than 100 million levs unutilised.

Second comes the debt of 1 billion levs in "support the banking stability", as euphemistically it has become accepted to say lately. It is no secret that here we are talking about those 900 million levs that First Investment Bank holds, after for half a year it will repay about a quarter of those 1.2 billion levs, which it received as liquidity support from the state. Actually First Investment Bank owes this money to the banks that purchased government securities issued by the Treasury in July. But here one can also believe that the debt will be repaid in the foreseeable future. And that citizens are not direct debtors again.

And finally comes the debt of 1.5 billion levs - to cover the estimated amount of the budget deficit at the end of the year. This is money that will sink like water into sand in police salaries, municipal programmes and funds. (Here one can exclude payments to livestock farmers, flood damage and other urgencies.) The report for October shows that the mismatch of revenues and expenditures in the state budget is around 1 billion levs. There is a reason for optimism, because the rates of collection continue to grow. In October the collection, for example, from excise duties, is twice higher than in any of the previous months of the year - 763 million levs against approximately 330 million levs as a monthly average from January to September. There also could be expected an "unutilised" part of some of the proposed new debt - if it happens that revenue collection in the country continues to be not that disheartening.

And here comes the long-awaited amount of EUR 800 million. In the end, if one looks at the things with the pragmatism of a layman, the first part of the debt be returned by the Deposit Guarantee Fund. True, the Fund will return it to people’s deposits in banks because the contribution of each bank is a percentage of the deposit base in it. But this is a long process. Second, First Investment Bank for a period of two years is expected to recover its debt. Third, the money to cover the deficit will be a burden for a long period of time.

Here let us remind that the total debt of Bulgaria (internal and external) was 19 billion lev (about 18% of the country’s gross domestic product) before updating the official data at the end of September. This means that everyone in Bulgaria - from the newborn to one who is dying, owes more than 2500 levs. This amount seems large for many Bulgarians, but its return is indefinite in time, and most often is inherited by future generations. And Bulgaria is at one of the last places in Europe in terms of this debt. According to the Maastricht criteria the upper limit of the government debt to GDP is 60%. The new debt that will be generated to cover the deficit, accounts for new 200 levs in debt per capita, which is negligible.

The other important point is that the government next year should be able to start afresh and implement its own budget, so that everybody will be able to assess more clearly its efforts.

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