Bulgaria to Be Next EEU Nation to Get IMF Aid, Brezinschek Says

By Tasneem Brogger and Michael McKee

June 29 (Bloomberg) -- The Bulgarian government that emerges after July 5 elections will seek an international bailout to repay the country’s short-term debt, Raiffeisen Centrobank SA Chief Economist Peter Brezinschek predicted.

The ruling coalition of Socialist Prime Minister Sergei Stanishev may be defeated by GERB, a party set up by Sofia Mayor Boiko Borissov, who won European Parliament elections on June 7, polls show. Borissov said on June 18 his country needs to “immediately” sign a deal with the IMF.

“There are informal discussions with the IMF -- this is not official yet, they haven’t reached a conclusion,” Brezinschek said in a June 26 interview in New York. “After the elections, a new government will be in power and we’ll have an official announcement that Bulgaria will get assistance from the IMF in conjunction with the European Union.”

Bulgaria, like Latvia and Belarus, lacks sufficient reserves to cover debt coming due this year and may have to tap “official sources” for more capital, the World Bank said on June 22. The Balkan state, which joined the EU in 2007 and pegs the lev to the euro in a currency board, will have “the majority of the short-term refinancing needs met by the financial aid from the IMF,” Brezinschek said.

Gross foreign debt is equivalent to 107 percent of the economy and foreign reserves slumped 16 percent in the second half of last year. The budget surplus fell 83 percent in the first four months to 352 million lev ($249 million) and may be wiped out by year-end.

New Government

The government and the central bank have rejected calls for an international bailout similar to those received by fellow EU states Hungary, Latvia and Romania and by Belarus, Serbia and Ukraine outside the bloc. Bulgarian officials maintain the currency peg is backed by central bank reserves of $16 billion.

GERB led in a June 24 opinion poll by Mbmd agency, with 24 percent, while the Socialists were second with 18.5 percent, and the Movement for Rights and Freedoms, a junior coalition partner that represents ethnic Turks, were third with 14 percent. The survey of 1,202 people was conducted between June 18 and June 22 and had a margin of error of 2.8 percentage points.

“The development for Bulgaria principally depends on the new government, how the new government will create an environment for foreign direct investors to invest,” Brezinschek said.

‘Diminishing’

The country’s investment inflows “are diminishing, and the risks to Bulgaria’s ability to access the external financing it needs to cover its external debts have risen,” the Economist Intelligence Unit said in a June 26 report.

Foreign direct investment shrank to 955 million euros from 1.92 billion euros in the same period a year ago, the central bank said on June 17.

Most of Bulgaria’s FDI is channeled toward industries that support domestic demand such as banking, real-estate and utilities. The country must divert FDI flows into more industries that support exports to achieve more a sustainable expansion, Brezinschek said.

“If they can manage that, and maintain the currency board until this change in the industrial structure takes place, I would feel confident,” he said. “Otherwise they have to give it up because it’s too confident.”

Croatia Bailout

Croatia will also “definitely” need an IMF bailout, Brezinschek said, adding there are “some indications there have been contacts” between the government and the IMF.

“We have packages for Hungary and Romania of about $25 billion,” he said. “I would say it’s half to two-thirds of that amount that would be sufficient to stabilize them. It’s a question also of how long the aid will be provided. If it’s just two years, like Hungary, then it’s not more than $15 billion to $20 billion.”

Bulgaria’s economy shrank an annual 3.5 percent in the first quarter, the first contraction in 11 years. Croatia’s gross domestic product may drop as much as 4 percent this year as consumption and investments decline, central bank Governor Zeljko Rohatinski said in May.

East European nations have received more than $90 billion in international aid since September to avoid defaults.

To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.net;