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Desislava Nikolova is chief economist at the Institute for Market Economics (IME) and currently its interim CEO. The Institute is a non-profit organisation that deals with the analysis of economic policies in Bulgaria, aiming to justify the benefits of free choice in various spheres of the economic life and to promote less interference in it on the part of the state. Desislava Nikolova talks to Polina Spartyanova.
     How has the political instability in Bulgaria, since January-February 2013, affected the economy of the country?  
     The energy sector is a very bad example of what this vacuum can cause. It formed in politics because of the lack of government for part of last year and due to the absence of Parliament during the term of the interim government. Over the past year and a half, Bulgaria has lived in a political crisis and therefore the classical consequences of a political crisis on the economic life in different directions are apparent. In terms of our work, this relates to the lack of reforms in the most difficult spheres, in the budget and the economy in general, and even steps backwards have been made in some areas, which is a kind of regression that is motivated by populist arguments such as the power industry. In it we saw that the "independent" regulatory body acts under pressure of the government, making decisions that are detrimental to the entire electricity system, increasing the imbalances in it, the mutual obligations and debts, only to reduce the cost of electricity for consumers with several percentage points. An IME analysis shows that the decisions made by the regulator (the State Commission for Energy and Water Regulation) in several periods over the past year are contrary not only to the national legislation, but also to the European principles of non-cross subsidization between the separate participants in the market, regarding the reasonable coverage of reasonable costs through pricing decisions. It is clear that the regulator systematically refuses to approve the investment costs of the electricity companies, to the detriment of the whole system, because no quality service can be provided in the absence of investments. Eventually electricity prices will have to be increased but this will not solve or exhaust all the problems in the power sector.
     The culmination of the entire political crisis was the decision of Standard & Poor's rating agency to lower the rating of Bulgaria with one point. At present, the rating of the country is the last before the so-called junk ratings, but it is still in the category of the investment credit rating.
     Bulgaria is dependent on Russia in terms of energy. What do you think can be done to diversify the energy sources in our country?  
     In terms of electricity, for example, we need to consider the involvement in the pan-European networks in the case of a decline in production here and in crises so that other countries can be included in the event of a collapse of the local system. Electricity is a specific commodity, there is no way to store it, and therefore it must be instantly consumed in an effective manner.
     In terms of gas, Bulgaria has several deposits in northeastern Bulgaria, near Shabla and Kaliakra, which over the years have covered between 10% and 15% of the country's requirements. Nabucco pipeline was also a good option to provide alternative ways for gas supply. Another option, which I think should not be disregarded, is shale gas and it should be explored, taking all necessary measures to protect the environment.  
    The detrimental dependence on Russia in every aspect of the power industry that extends beyond the energy sector, to Bulgaria’s overall economy and policy, is apparent. Obviously some political parties are financed by Moscow precisely for this purpose, namely to maintain the political status quo and fight against the diversification of supplies and against the search for options for diversification. This should also be on the agenda of the new government, but I rely on the European Commission, because it appears that there is already such a priority at the European Union level. I think a united effort and coordinated action such as the plan for a European energy union, which is currently being considered and discussed, could be of great benefit to us.   
     What caused the collapse of Corporate Commercial Bank? Did the Bulgarian institutions respond adequately in this case in your opinion?
     The political crisis extended to the banking sector, which is a classic scenario in many other countries, i.e. its influence “spilled”. Due to the quick action on the part of the central bank and the government, and of the banks themselves, the crisis was under control, but it illustrates the fragility of the banking system and the economy, and their susceptibility to similar political and economic scandals, especially in terms of lack of confidence in the political status quo.
     The shaken political situation and those scandals that occurred in the CCB-Peevski group, and in the groups with economic interests reduced the level trust, and a banking system and its stability are built on trust. No bank is able to survive in the presence of low confidence because no bank holds 100% of all deposits.

     In this case the state acted very quickly and adequately, especially in the case of First Investment Bank. According to economic theory, bank run does not occur if there is no genuine weakness of a bank and the case with Corporate Commercial Bank confirms it to some extent. This close link between the policy and the relevant business interests and the dependence of the economic interests of the banking business on the state played a bad joke on the bank.
     In your opinion, why was First Investment Bank attacked, instead of Raiffeisen Bank or UniCredit Bulbank?
     The case is currently under investigation but I am not involved in it to tell you exactly what happened and why. However, I think the attack against this bank was purposeful, in view of the fact that it is a Bulgarian bank with Bulgarian capital. It is a bit more vulnerable compared to the others, as it has no major international owner behind and is therefore more prone to such attacks. Obviously, this was an intentional attack and due to the shaken trust, it very easily managed to find firm ground and spread, but the banking crisis was averted. To some extent, this indicates the mature economy of Bulgaria that did not allow the banking crisis of 1996-1997 to repeat.
     In general, the government budget is in a relatively good condition, the revenue forecasts set in it are quite optimistic but are currently not implemented. In view of the overall macroeconomic situation and the state of the European Union, we cannot expect significant revenue growth. Nevertheless, it appears that the economy is recovering compared to the end of last year and there are more convincing signs that we have already left the crisis behind. One of those signs is the labour market, where there is serious net job creation, which was missing in 2009-2013. It is also apparent that the number of discouraged unemployed has been gradually decreasing since last year, and they are actively looking for a job, which is good news.
     Economic growth has increased compared to the previous year but the biggest disappointment comes from the decline in exports in the first quarter of the year. I hope that, due to the relative strength of the European economy, things here will improve in the coming months.
     What do you think of the banking supervision in Bulgaria? Is it effective in your opinion?
     In general, the requirements to the banks in Bulgaria are much stricter compared to those in the majority of the European countries in terms of capital adequacy and liquidity ratios. Moreover, the central bank very strictly follows the developments in the banking sector, continuously draws up instructions for capital allocation and increase, and its report show this very clearly in. In my opinion, the banking supervision in Bulgaria is one of the best and none of the banks has fallen within the risk categories as shown by the stress tests carried out by the European Union on the banks in the country. The big problem of Corporate Commercial Bank was due to the political status quo and to the fact that it held huge resources of public companies. However, beyond this relationship, the banks operate in an extremely competitive environment and the very fact that there have been no bankruptcies over the past 20 years means that the banking supervision works properly.
     Recently, the European Commission decided to approve a scheme that would allow the Bulgarian government to possibly support the banking system with 3.3 billion leva. Do you think the government will have to grant a financial aid to the banks at this stage?
    The situation has settled down and an additional support does not seem necessary. You know that the government has obtained a loan, which is also supposed to support the banking sector, but most likely, it will not be used because it is not necessary. I think it was rather a nine days’ wonder and it passed away. It will only take time to recover the shaken trust in the banks. The current situation is very fragile and requires reasonable talk, and all institutions should support the recovery of trust.  
     Won’t these bonds, which the Bulgarian government issued ten days ago, be a burden to the state? Will it be able to return them?
     They are long-term loans and generally, there is no problem with the fiscal balances. There is a fiscal reserve, which is above the legal minimum, and it is the guarantee of the return of government borrowing. Moreover, the projected budget deficit this year is relatively lower than that of the other European Union member states; it amounts to 1.8% of GDP. As an organisation that is fighting for less government involvement, we would like to see some reduction of government spending as well as deficit reduction, and in an even better case, balancing the budget, as every deficit must be financed from the fiscal reserve or with new debts that will have to be repaid sooner or later.
     This year it is expected that the government will obtain more loans for three reasons. The first is to refinance the maturing debt, the second is to finance the deficit through a debt and the third reason that requires larger loans is the Eurobond that will mature early next year. It is one of the two bonds, which were emitted by the government of Simeon Saxe-Coburg, in order for the funds of these Eurobonds to finance the Brady bonds emitted during Bulgaria’s default in the early 1990s.
     The problems are not so much related to the current budget state but to the perspective of the bankrupt health, pension and energy systems.

     How will new government elections in the autumn affect Bulgaria’s economic stability in your opinion?  
     In general, the situation cannot worsen over time because we are in this vacuum of timelessness. Even if the parliament votes some laws in these last few weeks, they will apparently be extremely lobbying, not in favour of the general public but in favour of clear business interests. This is the risk of the work of this Parliament.
     I think the sooner the elections take place and a legitimate parliament and government respectively are elected, the better. It should have the support of the majority of voters because otherwise this cycle of the last year and a half may again start, namely an illegitimate government with a relatively low support that made ​​several missteps which totally swept away its reputation. The economy needs a stable political environment and perhaps growth in the first quarter would have been higher if this political crisis had not continued.
     The new government should start its mandate in a stronger and more convincing manner, and it must adopt the budget for next year, as it will have to work with this year’s budget otherwise. The new government will take the burden of all the wrong decisions that are now accumulating negative effects on the economy as a whole