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Borisov and Goranov Will Fish in Troubled Euro-Waters


Prime Minister Boyko Borisov hastened the country's course towards membership of the ERM II and the European Banking Union, after only two months ago he spontaneously decided to slow down a bit and seek "public consensus" on the topic.


His ambition now is that Bulgaria is to re-apply for the "Eurozone waiting room" by the end of April, with the only motive being "millions and billions" given out in the monetary union as loans to which our country does not currently have access. In this case, the government's strategy is to "fish in troubled water" and take advantage of the chaos along the coronacvirus crisis to maximize benefits. Whether the moment is good and the benefits are weighed correctly are two rather controversial issues. The risks of our ERM II membership remain unclear as well.

 

Final preparation

A few days ago, the Prime Minister covered his head in ashes, admitting that he did not have to "give in on the waiting room" because the current pandemic has shown that those in ERM II will receive millions and others will withdraw credits . In his typical unspoken style, Borisov also mentioned the correspondence with Commissioner Valdis Dombrovskis and ECB President Christine Lagarde, but did not provide any further clarification.

Because only two months ago, Dombrovskis himself publicly declared that our invitation to join ERM II was postponed until July. Now we have learnt that Bulgaria will apply again - who hid what from Bulgarians then?

 

However, in his statements, Finance Minister Vladislav Goranov reiterated that our country has fulfilled almost all requirements for membership in the Euro waiting room. The final step is to strengthen the capital positions of one of the two Bulgarian banks, which identified a capital shortfall in the most negative scenario of the ECB's stress test. Goranov said that one of the banks - Investbank, has already formed additional capital buffers, while the other is at 70% and makes a final go.

 

"Only one step remains to fully implement the plan we have set out before applying. In the coming weeks, we will be working on the last element of this plan. If we do our job on the schedule, we will be able to join the Banking Union and ERM II at the same time, "Goranov noted.

 

According to unofficial information, the deadline for Bulgaria to submit to the ECB the results of the recommendations will expire on April 26. The regulator will then draw up an opinion which is decisive for our country to move to the next phase of the process - negotiations with the Euro group and the European Commission.

 

So far, there is no guarantee that Bulgaria's potential candidacy will fit into the EU agenda in 2020. The finance minister has already suggested that most technical deadlines can be delayed.

 

BNB Governor Dimitar Radev, however, said that the deadlines set by Bulgaria are no longer realistic. Radev specified that the work has not stopped, but a possible postponement for 2021 "will not be fatal."

 

The imaginary millions for Bulgaria

 

The truth is that the ECB does not release trillions, as the Prime Minister put it, even for members of the euro area.

 

So far, two instruments are known to counteract the coronacrisis in the monetary union. In mid-March, the ECB increased the volume of "quantitative eases" - the euro area member bond purchase program - to 750 billion euros. However, this program does not lead to a direct financial injection, but is debt financing - banks buy government debt,

the bonds are then acquired by the ECB, which reduces the costs of euro area countries and frees up their capacity to take on new debt.

 

The second scheme (worth EUR 240 million) is financing through the European Stabilization Mechanism, whereby, through special credit, euro area countries can reduce the economic damage caused by the pandemic. That is, in any case, it is a loan, not a grant.

 

Either way, countries that are in ERM II but have not adopted the euro do not have access to ECB instruments. The direct benefits for Bulgaria in such a status will be comparable to those received by Denmark. As early as the start of the coronavirus crisis, the ECB provided a swap line of € 24 billion to the Danish Central Bank to provide euro liquidity if needed. The aim is to ensure that the Danish financial system does not start experiencing a euro deficit due to the crisis.

 

Bulgaria will probably also be able to rely on access to euro liquidity. According to skeptics about our membership in the euro area, however, such support is not needed in Bulgaria at the moment, as BGN has 156% coverage in euro. That is, there is no euro deficit in our financial system, and ultimately it does not go about a financial injection to prevent bankruptcies or keep jobs.

 

According to former Finance Minister Petar Chobanov, if Bulgaria joins the "Eurozone waiting room", it will be able to receive part of the € 240bn earmarked from the European Stabilization Mechanism. However, in his words, the conditions for receiving support would be difficult. He sees a significant risk for our country's membership in the Banking Union.

 

The risks

 

When joining the banking union, credit institutions in our country will be effectively controlled by the European Central Bank. BNB will not be able to intervene, as is the case now with the introduction of a moratorium on loan contributions, for example.

Moreover-now the BNB has obliged commercial banks to reduce their foreign exposures, i.e. the money provided to the mother-banks abroad to be returned to our country. The expected financial effect of this provision was BGN 7 billion.  With effective membership of the EBA, such a decision will depend on the ECB.

Petar Chobanov claims that entering the Banking Union, there is a risk that foreign banks will withdraw their capital from our banks, most of which are their subsidiaries here and then turn them into local branches.

 

He told Banker, back in January this year, that Head of Banking Supervision at the ECB Andrea Enria announced the strategy to consolidate as much capital as possible in parent banks and in countries like Bulgaria the banks should work with their branches rather than subsidiaries.

 

"When we become part of the Banking Union, the banks will be supervised at the group level and it will not make sense to have the capital spread across subsidiaries," Chobanov explained. "The ECB is interested in capital being consolidated in the parent bank and in providing stability for the whole group. The idea is to provide liquidity even faster, ie. to take from the branches and load the parent bank. At the moment, however, the ECB is facing some resistance from the euro area countries, so it will be much easier for the ECB after BG entering the Banking Union to test how this strategy works in Bulgaria. It refers to a capital of BGN 6 billion. I am not saying that this will necessarily happen, but after the head of the ECB's banking supervision says this, it means that it is being worked in this direction, " Chobanov explained.

 

He added that the other idea at a pan-European level is to create four or five "champion banks" through acquisitions and mergers but such concentration is very dangerous because it also concentrates the risk that they will be forever supported against bankruptcy. In this way, huge resources can be spent and these banks may have risky behavior.

 

We can add to the risks that from the date of our entry into the "Eurozone waiting room", Bulgaria will have to transfer the funds from the National restructuring fund of credit institutions, where more than 700 million have already been accumulated to its european equivalent. The necessary legislative changes were adopted by the National Assembly as early as 2019.

The problem, however, is that since its creation in 2014, the European Fund has so far refused to fund the restructuring of ailing credit institutions in countries such as Italy, Spain and Lithuania. Having in mind it has accumulated EUR 28 billion.

 

We should not forget that when we join the euro area, our country will immediately have to make a contribution to the European Stabilization Mechanism of 0.5% of GDP. That is, then our state treasury will be deprived of at least about 250 million Euros or 500 million BGN.

 

Of course, which countries will be supported by these funds will not depend on the opinion of the Bulgarian government, but on the management of the European Stabilization Mechanism. For example, in the fight against the coronavirus, funds are channeled to financially unstable Spain and Italy at the expense of Germany and the Netherlands.

 

It should also be borne in mind that the standard path from ERM II to the euro area is a minimum of two years, in which support programs can be repeatedly modified in the context of a super-dynamic environment. But as long as there is no limit on staying in ERM II and the subsequent automatic admission to the Eurozone, things depend on a political decision, but at a higher level.

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