[size=75:g8g3kjkn]novinite 5 March 2010

Bulgaria Faces Junk Grade on External Debt Concerns, Fitch Says

Bloomberg Agency

Bulgaria, the European Union member with the smallest budget deficit, may still see its credit rating lowered to junk as an external debt burden bigger than total output threatens financial stability, Fitch Ratings said.

“The jury is still very much out on the path of the macroeconomic adjustment,” said Edward Parker, head of emerging Europe ratings at Fitch in London, by telephone yesterday. “The fiscal position is a strong one. However, it faces risks from the private sector, which has high levels of external debt, which leaves it in a vulnerable financial position.”

Fitch rates Bulgaria’s foreign-currency debt BBB-, the lowest investment grade, and has kept a negative outlook on the rating since April. The Balkan nation had gross external debt of 37.6 billion euros ( billion), or 111 percent of the economy, at the end of last year. The poorest EU member may be facing pressure on its current account and currency peg, Parker said.

An EU member since 2007, Bulgaria faces a ratings downgrade as it “still has a substantial current account deficit and there’s a lot of uncertainty about how that will be financed and what impact that’s going to have on growth,” said Parker.

The current account, which was in surplus in the third quarter last year, turned to a deficit that swelled to 327 million euros (4 million) in December, the widest since May, according to central bank data. The deficit was 8.6 percent of GDP in 2009, the government estimates.

Deepening Contraction

The current account shortfall swelled to a quarter of gross domestic product in 2008, one of the largest in the emerging market universe that Fitch ranks.

A large chunk of the foreign debt stems from the financial system. Bank industry debt last year was 8.4 billion euros, about a quarter of GDP, and private sector debt stood at 12.08 billion euros, or 37.6 percent of GDP, the central bank says.

The economic contraction deepened every quarter last year, sending output down an annual 6.2 percent in the last period, the statistics institute said on Feb. 12. The economy probably shrank 4.1 percent in 2009 and may grow 0.3 percent in 2010, the government estimates. Parker expects a contraction this year, lowering Fitch’s earlier estimate for stagnation.

‘Significant Fragility’

Bulgaria, which pegs the lev to the euro, is among the countries in Eastern Europe that display “significant financial fragility,” New York University Professor Nouriel Roubini told Vienna-based Der Standard on Jan. 28.

The nation of 7.7 million people has 30 banks, 85 percent of which are foreign owned, according to the central bank.

The biggest are UniCredit Bulbank AD, a unit of Italy’s UniCredit SpA;
DSK Bank, a unit of OTP Bank Nyrt., Hungary’s largest bank;
United Bulgarian Bank, owned by the National Bank of Greece SA;
Raiffeisenbank Bulgaria and Eurobank EFG Bulgaria.

Bulgaria “is a country with a relatively large banking system for its income levels and very high levels of external debt,” Parker said. “Given the more difficult external financing situation there is more uncertainty about how it’s going to service that private sector external debt.”

With loans exceeding total deposits by about a third, banks in Bulgaria need to tap their parents to fund lending. Western banks are busy writing down bad debt and reducing their balance sheets, reducing funds available to sustain foreign units. That may be bad news for Bulgaria, whose banks have more than half their lending denominated in foreign currency, mainly euros.

This “could lead to pressures on the balance of payment, GDP growth and the currency board, with adverse consequences for the public finances,” according to Parker.