THE ECONOMIST: BULGARIA, WHY THE RUN ON BANKS?

IN A country struggling with rampant corruption, a weak judiciary and unstable governments, the Bulgarian banking system has consistently won praise for its stable institutions, high liquidity and low risk. In the last few weeks that system has come under attack in the worst run on banks in 17 years.

The central bank said runs on First Investment Bank (FIB) and Corporate Commercial Bank (CCB), the country’s third and fourth largest lenders, in the last two weeks were part of a “deliberate and systematic attempt to destabilise Bulgaria's banking system”. According to the authorities, criminals tried to disrupt the system by sending emails and text messages urging people to withdraw their funds from several large banks.

The banking crisis was made worse by political instability. The Parties recently agreed to a snap election and the Socialist-led government of the prime minister, Plamen Oresharski, is expected to resign soon. Mr Oresharski’s cabinet was in power for barely a year, plagued by street protests demanding its resignation and by a controversy over the South Stream gas pipeline.

The attackers’ plot seemed to work, at first. On June 27^th, rattled depositors withdrew around €400m ($547m) from FIB in a matter of hours. A week earlier, the central bank took control over CCB after customers rushed to withdraw their savings unnerved by media reports about one of its owners.

While CCB remains closed as the authorities are devising a plan to save it, FIB resumed operations on June 30^th. Over the weekend the authorities appealed for calm and arrested several people suspected of orchestrating the attack. Also on June 30th, the European Commission approved a request by the Bulgarian government to extend an emergency credit-line of €1.7 billion to local banks.

“The Bulgarian banking system is well capitalised and has high levels of liquidity compared to its peers in other member states,” the Commission said in a statement  yesterday. “For precautionary reasons, Bulgaria has taken this measure to further increase the liquidity and safeguard its financial system.” Bulgarian banking shares climbed sharply yesterday, led by FIB whose shares rose 24,6%. Queues were still forming outside branches of FIB, but they were visibly shorter than on June 27th.

According to Georgi Angelov, senior economist at the Open Society Institute in Sofia, the reasons for the crisis are not systemic. “The banking system is stable--the liquidity is very high and it has one of the highest capital-adequacy ratios in Europe, at about 20%,” said Mr Angelov in an interview. He explained that the situation in Bulgaria was not like in Cyprus where the banks were bankrupt and that the Bulgarian problem came from outside the banking system.

Last week anonymous e-mails, social-media posts and mobile-phone messages were sent to FIB customers, fanning fears about the safety of their deposits. Bulgarians have bitter memories of a grave financial crisis in 1996-97 when 14 banks went under in a little over a year, sp they flocked to the bank branches. After they withdrew around 800m lev (€400m) in a few hours, FIB said it had to close operations over the weekend.

On June 29th Bulgaria’s national security agency said it had so far arrested six people suspected of involvement in the attack. One of the emails sent by one of the suspects, released by the authorities, said that other banks, including Italian-owned Unicredit, “are in very bad condition and even a small percentage of withdrawals would push these institutions into bankruptcy. Deposits of citizens will be sacrificed or lost to save the Bulgarian economy.”  The email concluded with a proposition: “In connection with these facts, we have an attractive offer how you can protect your money.” It is unclear who ordered the attack on FIB. Bulgaria’s authorities have launched a criminal investigation.

The run on CCB had more obvious reasons. On June 20^th, Bulgaria’s central bank put CCB under supervision and suspended its operations after more than 20% of deposits were withdrawn in a week causing a liquidity crunch. The reason for the run on the bank was a public spat between Tsvetan Vassilev, a businessman and the bank’s largest shareholder, and Delyan Peevski, a controversial businessman and member of parliament for the ethnic Turkish minority party, DPS. Mr Peevski, who is said to have built his family’s media empire with loans from CCB, claimed in media statements that Mr Vassilev planned to kill him. Mr Vassilev denied this and, in turn, accused Mr Peevski of sending him threatening text messages.

CCB is set to open again on July 21^st, according to Bulgaria’s central bank which has begun delving into the lender’s accounts and has appointed independent auditors to find out what went wrong. If rescue talks fail, Bulgaria plans to nationalise CCB.

Despite the banking woes, Bulgaria managed to sell €1.49 billion of ten-year government bonds on June 26th attracting strong appetite from international investors whose bids more than doubled the amount on sale. The 2.95% annual coupon was the country’s “lowest ever” in an auction, said the finance ministry.