Blind Bulgaria

At the outset of the financial crisis, many thought it would stay within the borders of the U.S. Others warned the crisis would spread, but these voices remained largely unheard, especially in Eastern Europe. So, some countries were completely unprepared for the impact of the crisis, leaving their economies shaken.

This is particularly true for Bulgaria, where politicians preferred to throw dust in people’s eyes, telling them the local economy would not be affected, and that the government had enough reserves to back up the economy in an emergency. They were right to a certain extent: Bulgaria currently has a €2 million budget surplus. However, there is another problem that the government has chosen to ignore: The current budget  deficit is estimated at 20% of the GDP, and is expected to increase further next year.

This deficit is a result of the withdrawal of Foreign Direct Investment (FDI), an event the ruling party said was unlikely. When making this assumption, they did not take into consideration that the world is currently going through the worst financial crisis since the Great Depression, and most EU and Asian countries are already being affected. The Bulgarian National Bank, reports a decrease in foreign investments estimated at €1 billion as a result of the crisis. Thus, it becomes apparent that the crisis is no longer a problem solely affecting Western Europe and the U.S., but Bulgaria as well.

"One of the biggest engines of the Bulgarian economy for the last seven to eight years has been direct foreign investments.  In a time of global financial crisis however, these investments cool down," said Markus Ulreich, Head of EMEA Continental European Sales at Bank Austria International Markets - member of the Unicredit, in November.

"In this case, the government has to finance the small and medium-sized businesses in order to maintain GDP growth."

One of the most important requirements is a restriction of public spending, according to Bulgarian minister of finance, Plamen Oresharski, a figure that is expected to reach 40% of the GDP in 2009.

The crisis creates severe problems for foreign investors, which is likely to translate into greater problems for the Bulgarian economy – a significant reduction in FDI could lead to a sharp drop in economic growth, bankruptcies of local companies and even a wave of unemployment.

Despite these risks, the government has sought to reassure the population of the economy’s stability.  So, while investment banks like Lehman Brothers, with total assets more than ten times the GDP of Bulgaria, were going bankrupt, the Bulgarian government did everything in its power to gloss over the problem by insisting that the economy was well-protected and the crisis highly unlikely to reach the Balkans.

As one of the poorest countries in the EU, Bulgaria will feel the effects of the crisis keenly. When the crisis hit, there were immediate repercussions. Many people have ended up on the streets: So far, 10,000 people have lost their jobs, and another 50,000 are expected to lose theirs in turn, according to Nikolai Laskov, a journalist for Info Pari Online.

Certainly the tidal wave of international banking failures is a major factor in Bulgaria’s difficulties.

"The problem is that, unfortunately, all financial systems in North America, Europe, Asia and Australia have been working in one ‘global family’ for years," says Markus Ulreich. "This is what we are seeing now: the problem of one ill ‘child’ becomes the problem of a whole ‘family’. It is a ‘domino effect’, a chain reaction."

These problems have been compounded by an EU decision on Nov. 25 to extend the freeze on development aid worth a total of €560 million in development aid to Bulgaria, citing fraud and corruption in the use of EU funds.  The sum had been frozen since July and represented the first time ever the EU had taken such a move against a member state.

So, while some of Bulgaria’s difficulties can be traced to international pressures, it is the domestic corruption that may in the end be most to blame, leaving the government paralyzed and unable to act against the crisis preemptively.

"As a consequence, the cost of credit in Bulgaria has increased and the volume of lending decreased," says Ulreich. "Combined with a recession of exports and imports, this has led to a deficit on the current account."

Thus, while future developments remain difficult to predict, the short term effects of the crisis will slow the Bulgarian economy, as well as a reduce foreign direct investments and enforce new restrictions in the credit sector.