Euro story

   Divided as Bulgaria’s political landscape is, very few topics receive unanimous

support from politicians and voters alike, but the need to maintain the currency board is likely the issue that comes closest.

After the banking crisis of 1995/96 decimated Bulgaria’s banking system and erased the life savings of hundreds of thousands, the currency board helped restore some degree of confidence in banks, as well as helping Bulgaria’s economy recover.

But some degree of mistrust remains and any talk concerning abolishing the currency board and the current value of the lev pegged to the euro is viewed with suspicion as an attempt by a few in the know to benefit at the expense of the many.

The lower interest rates on loans in euro during the credit boom in recent years have led thousands to take loans in euro. The share of euro-denominated loans and advances was 57.5 per cent at the end of August 2009, according to central bank data. For corporate loans and advances, the ratio was 70.2 per cent.

Maintaining the current value of the peg ensures that a large number of those companies and individuals would not be driven to bankruptcy because of currency rate fluctuations. The only real guarantee of that, however, would be Bulgaria adopting the euro at the current peg.

Early days
Since the currency board agreement was put in place in 1997, periodic speculation in the media about whether Bulgaria should continue using the existing arrangement has caused mild unrest.

In May 2000, just two months after the European Commission started full membership talks with Sofia, the governor of the Bulgarian National Bank (BNB) at the time, Svetoslav Gavriiski, was forced to speak out to shoot down speculation that the issue of floating the lev was being discussed by the central bank.

"The currency board has proven its advantages in preventing our country in the past three years from external and domestic crises that have occurred before its introduction," he said on May 11 2000. "I do not see reasons to cancel the system. This has not been discussed in the central bank nor in the government." Already then, the issue of a candidate or member state unilaterally adopting the euro, without the blessing of the European Central Bank (ECB), was causing considerable dismay in Western Europe. After Estonia floated the issue, only to have it forcefully rejected, Gavriiski felt compelled to expressly rule out such a scenario.

"Unilateral adoption of the euro prior to formal EU membership would not produce any advantages, especially after the ECB has made it clear that it would not support similar moves elsewhere," he said.

Ambitious target
The centre-right government that elected Gavriiski to head the BNB and which began European Union membership negotiations was voted out of office in June 2001. The new government headed by former monarch Simeon Saxe-Coburg continued, which picked up where its predecessor left off as far as EU accession talks were concerned, proved to be more bullish on euro adoption.

Consistently posting Budget surpluses, free of currency variations because of the currency board and with government debt low, the new cabinet and the BNB governor it appointed, Ivan Iskrov, were confident that Bulgaria could join the exchange rate mechanism (ERM-2) as soon as the country became a member of the EU on January 1 2007. Under the Maastricht criteria for adopting the euro, a member state must keep its currency trading in a 15 per cent band against the euro in ERM-2 for two years before joining the European monetary union.

Just days after 10 countries joined the EU in the bloc’s largest expansion, Iskrov said that Bulgaria’s currency board, like those in the Baltic states, meant that the country could join the ERM-2 right on accession.

"Our estimate is that if we join the European Union on January 1 2007, and there are no negative signs that make this appear unlikely, we hope to be ready to enter the euro zone immediately," he said on May 4 2004.

Several months later, Iskrov and then-finance minister Milen Velchev made the target official. "We declare that Bulgaria will aim to enter the eurozone in 2009," Velchev said on November 25 2004.

On the same occasion, as if seeking to assuage lingering doubts, Iskrov said: "In practice, we are announcing from today that Bulgaria will keep its currency board regime, not only until joining the European Union, but until joining the euro zone, and at the current peg."