Банкеръ Daily


We will prop up the currency board with a currency swap

The government is strengthening the currency board, which has become a sacred guarantee for the financial stability of the country for the last two decades. In recent days, Prime Minister Boyko Borisov, Finance Minister Vladislav Goranov, and the BNB have made several key announcements.

The first one was that, literally, in a few days, our country would officially apply for membership in the ERM II currency mechanism - the so-called euro zone waiting room.


And last but not the least was that a swap agreement with the European Central Bank was to be concluded, amounting to EUR 2 billion. On 23 April the agreement was bilaterally confirmed by the European Central Bank and the BNB.


Financiers comment that this swap agreement is an expression of increased confidence in Bulgaria and will be an additional plus when applying for membership in the ERM II.


It practically allows the Bulgarian National Bank to raise up to EUR 2 billion in exchange for Bulgarian levs. The maximum maturity for each withdrawn amount will be three months. The agreement will be in force until December 31, 2020, for now but may be extended if necessary.


Such agreements have recently been concluded between the ECB and the other two countries - Denmark, which is part of the currency mechanism but has not introduced the euro and Croatia, which like Bulgaria is a candidate for membership in the euro area waiting room. However, the difference between us and Croatia is that there is no currency board there.


What is a swap line?


The currency swap line is an agreement between two central banks for currency exchange. Through it, a central bank can obtain foreign currency liquidity from the central bank that issues it - most often because it can provide the relevant currency to local commercial banks.


For example, a swap line with the Federal Reserve System enables the ECB and all national central banks of the euro area (Eurosystem) to receive US dollars from the Federal Reserve in exchange for the same amount in euros. This is the short definition of a currency swap on the ECB's website.


The European Central Bank has clarified in which cases this financial instrument is used:


When the situation on markets for a particular currency deteriorates, it becomes difficult for banks outside that currency area to finance assets related to that currency. The reason is that they do not have direct access to the foreign central bank that issues the currency. However, if the central bank in the country concerned has a swap line with the foreign central bank, it may provide the local banks with the necessary foreign currency without using its foreign exchange reserves.


In the case of Bulgaria, the idea of ​​a swap line with the ECB is to obviously provide euro liquidity when needed. Which means the BNB will provide Bulgarian levs to the ECB and will receive the euro at the current fixed exchange rate. According to Vladislav Goranov: "The swap line will be an additional guarantee for the stability of the currency board, even though it is covered more than 150% with the euro, since in such a crisis the board must be as protected as possible."


The pitfalls


Many of these currency agreements serve basically as a "safety net" and have never been triggered, the European Central Bank has noted. However, the bank also makes the important point that the agreement itself guarantees serious operational preparedness so that it can be easily and safely activated when necessary.


Such a demand may arise if commercial banks begin to experience a "thirst" for euro currency and there is a shortage in the market. The effective implementation of the agreement will then take place and, through the swap line, the BNB will receive additional amounts of euro currency from the ECB in exchange for levs. In this way, the BNB could pour liquidity into commercial banks. For the time being, however, this action is unnecessary as our banks are overflowing with liquidity. Separately, the current Bulgarian National Bank Act does not allow the Central Bank to refinance commercial banks, and in the event of such a situation, changes to the BNB Act would be required.


In fact, the government nailed the society at the beginning of the year with the silent revisions in the same law. It stated that the ECB and the Eurogroup were theoretically entitled to request a change in the BGN / EUR exchange rate. The tension was to be extinguished with a general decision of the National Assembly and Prime Minister Borisov had to step back on the road to ERM II in search of a public consensus that had never been reached.


The National Bank has serious foreign exchange reserves


According to the management of "Emission" department funds and deposits in foreign currency amounted to BGN 21.7 billion (11, 2 billion euro). This is due to the central bank's decision to order credit institutions to repay foreign currency and deposits, some of which were apparently deposited with the BNB. Applying for a currency swap with the ECB, it could be interpreted that Bulgaria, which is on a currency board, has problems with the full currency coverage of its national currency.


Such a dramatic development is unlikely to take place unless our country stays too long in a state of emergency, with complete blockage of business, exports and ambiguities in the workforce. However, given the gradual loosening of measures in Europe, such a move by the Bulgarian authorities would be illogical.


Nothing to do with the chances of ERM II


The claims that the conclusion of an agreement between the BNB and the ECB on a swap line indicates that our country is close to membership of the euro area waiting room are frivolous and even speculative. Over the years, the European Central Bank has entered into similar agreements with both Denmark and Croatia, as well as with Sweden, having nothing to do with ERM II, as well as Hungary and Poland, which did not hide their unwillingness to associate with euro zone membership.


Days ago, ECB President Christine Lagarde announced that the regulator was considering more swap lines in euro anyway.


Whether Bulgaria will join ERM II depends on the views of the European Central Bank and the Eurogroup. The Bulgarian government claims that our country has fulfilled almost all the requirements for membership of the Euro zone waiting room. The last of these was strengthening the capital position of First Investment Bank. According to Vladislav Goranov’s estimates, this step was completed at 70 percent. The Bank has already submitted to the Financial Supervision Commission a new prospectus for raising its capital by selling new shares.


The ERM II admission regulation does not point a deadline for the final decision announcement of the ECB. It is initially expected that the opinion will be drawn up within a few months. That is why it is possible that the resolution be postponed for the next year, which was signaled by Finance Minister Vladislav Goranov and BNB Governor Dimitar Radev.

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