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Victoria Mindova

Crisis, reforms, recovery program and structural changes are words familiar to every Bulgarian, born the '90s. All the generations that remember the communism in Bulgaria, remember the dark years that followed our newborn democracy with high inflation rate and even higher unemployment rate and lack of money. Today, the situation in Greece is similar. It missed the right moment to carry out the recovery measures quickly and decisively two years ago and now it is facing much more serious consequences.

In the overall situation of economic uncertainty, GRReporter turned to Krasimir Angarski to analyze the situation and to draw the parallel between the Bulgarian crisis in the mid 1990s and the Greek instability in 2011. He is the man who introduced the currency board in Bulgaria in 1997, consolidated the Bulgarian banking system and was a crucial figure in stabilizing the local economy.

Angarski was CEO of the Bank Consolidation Company, which restructured the Bulgarian banks and created seven large banks from 40 small weak financial institutions. In 1997, he became the Minister for Economic Reform in the government of Stefan Sofiyanski and Secretary for Economic Affairs to President Petar Stoyanov, having assumed the task to put the finances of the country in line with the support of the currency board. Then follow key posts at key institutions such as CEO of DSK Bank, in March 2005 he was appointed CEO of DZI Bank, part of the Bulgarian financial group DZI. On March 1, 2007, he became an adviser to the Board of Directors of Postbank and the management of Eurobank EFG Group.

Angarski is clear that if Greece is willing to avoid bankruptcy, it should immediately sell heavy public enterprises, reduce the public administration and start a bold privatization program to attract private direct investment. He said the International Monetary Fund and the European partners are not strict enough with the Greek neighbour, and if they really wanted results they should first check that the reforms are implemented and then sign a contract for financial assistance.

Do you think that Greece’s bankruptcy is inevitable?

If no decisive measures are taken, there is no way to avoid bankruptcy. Everything depends on Greece, the will for change and reform. Both political and public will is necessary. It is important to know as soon as possible that without domestic reforms, significant fiscal consolidation and structural changes bankruptcy will be the only way for the country.

Does bankruptcy mean ​​that Greece will have to leave the euro zone?

Not necessarily. There are different ways to announce bankruptcy. It could be done within the euro and by leaving the single European currency. However, I would like to stress again that bankruptcy would not be necessary if the political forces in the country carry out bolder reforms to limit the cost as much as possible to be able to resolve the debt crisis faster.

What would be the impact on the banking sector if Greece goes bankrupt? How would this affect the banks in the region, which have serious Greek participation?

A possible bankruptcy of Greece could affect banks in neighbouring countries if they are strongly dependent on the parent banks in Greece and if they have not taken care for their financial independence. However, if they have good capitalization and strong performance, they have to worry about nothing. Everything depends on the banks’ individual policy but financial institutions with good capitalization and without unnecessary panic will have no problem.

Do you think that the eventual bankruptcy of Greece is threatening the Bulgarian banking sector?  

It is threatening it as far as the psychosis, which we saw in Greece, is concerned. There was mass withdrawal of deposits from local banks to banks abroad. This could inevitably lead to bankruptcy. This, I think, is the most serious risk for our banking system, and hence, for the financial stability of the country. I hope that the government and the Bulgarian National Bank have developed an Action Plan concerning this risk, and have accurate estimates and concrete measures.

They should provide for specific measures in case of eventual bankruptcy of Greek banks having ownership in banks in Bulgaria. They should have accurate means of action if the customers of banks in Bulgaria are worried. There should be measures for possible bankruptcies of Bulgarian banks. For better or worse, still in 1997 we have predicted and provided legal regulations that in case of a banking crisis, in which there is a systemic risk, the Bulgarian National Bank is allowed to intervene partially, but the question now is where the money will come from.

Given that the availability in the reserve is only BGN 4 billion, in case of a new banking crisis we would have to seek loans or give up the currency board. All this would lead to the situation, which we know from the recent past.

Therefore, you recommend a stronger capitalization of the banks in Greece and the region.

Yes, I do definitely. Greeks should follow our steps - to capitalize, recover, merge in order to obtain new larger and more stable banks.

The first major bank merger in Greece after the crisis is between Eurobank EFG and Alpha Bank. How will this affect their Bulgarian branches?

If they merge, there will be a new large bank in Bulgaria too. Their representations in our country are separate banks with separate licenses. If the merger takes place in Bulgaria too, I think the result will be a very good large and unique bank. There will be cost savings, some offices will close, but the bank will be much more resilient to crisis situations. I appreciate that such a move would be very good for the country's financial system.  

Do you see parallels between the situation in Bulgaria in 1997 and in Greece today? Do you think that Greece could learn from the Bulgarian experience in restructuring the economy?

In 1997, Bulgaria had to cut 58,000 public officials. It had to close, liquidate or sell 64 state enterprises, to carry out mass privatization at a rapid pace in order to meet budget needs. We had to sell a series of public companies for several months, because we had to attract foreign direct investment.

For Greece, it was said that privatization will take place or companies or even islands will be sold, but nothing actually happened. It could not happen without reforms and privatization. The deficits made over the years have to be offset and there should be destitution. Therefore, political will is necessary and the Greeks have to admit that no one can pay their bill.

In Bulgaria, we had to reduce pensions to $ 10 in 1997 during the financial rescue period and then indexed them to $ 35-36 by the end of the year. I know the levels in Greece are different and it is not necessary to fall to such low values, but this is the way. To minimize spending while the deficit becomes zero in order to begin to repay the foreign debt that currently is growing.  

This requires political will and the government must explain in detail to the public why these changes are necessary and what will be achieved through them. If the population is not convinced of the importance of the measures, there is no way to accomplish this reform. Protests and strikes will not lead to economic recovery. A comprehensive program for the recovery of the financial system and the economy is necessary, which has to be implanted firmly and have public support.

Do you think that if Greece announces suspension of foreign debt payments things will get better? What is the Bulgarian experience?

Bulgaria was in a peculiar state of bankruptcy twice. Once a moratorium on the foreign debt was declared in 1990, when we did not pay our obligations for several years until we get on our feet. The second time was in 1997 when we rescheduled the debt. All this was accompanied with a very serious structural reform. People consent is necessary to run this program.

In Bulgaria, the recovery program was supported with the full majority of the parliament and there was only one abstention. All political parties agreed with the action plan and it started with very high confidence. Unlike our experience, it seems that the recovery program in Greece has many opponents, which means that it is not well explained to the people. On the other hand, there may be some other alternatives that I am not aware of, but when it comes to recovery measures, the government should take care to clearly explain why they are necessary and what the ultimate goal is.

From May 2010, the supervisory mission, known as the Troika of the International Monetary Fund, the European Central Bank and the European Commission, visits Greece constantly. The three institutions are like a currency board in Greece. It grants funds following a political decision, although the rescue program is not observed.

Could you tell us what happened in Bulgaria when the currency board was introduced?

First, we in Bulgaria had to meet approximately 17 pre-conditions before the International Monetary Fund agreed to support us financially. Then followed 20 more structural and fiscal reforms, which required additional measures to be granted the aid in tranches.

Fulfilling our obligations brought the results. First, the 300% inflation rate at the time of introducing the currency board declined to zero and there was even deflation for a short period. The exchange rate of the BGN fell to 1500 German marks from 3000 German marks. The financial system calmed down and so did people.

From this perspective, I believe that the supervisory Troika in Greece is not strict enough. In Bulgaria, we had to accept the program first, to adopt the laws and begin to apply them before we were granted the support.

You say that Bulgaria should draw an action plan in the crisis. Is this proposal connected with the financial instability of Greece?

Last week we found that foreign direct investment in Bulgaria is 76% less than in the same period last year. When the house of your neighbour is burning, you must be prepared that the fire can cross the fence. The European Union has already discussed the amount of the fee in the liquidation fund in case of bankruptcies, and we still do not dare to talk publicly about what steps we should take to limit the impact of the debt crisis in Greece and other countries. When it is known that the Greek stake in the Bulgarian banking market is 30-35%, who will come to invest in the country? Therefore, we need to develop scenarios for action in different cases - for example, what would happen in Bulgaria, if a large Greek bank with branches in the country goes bankrupt? The plan should say what we should do on the Bulgarian side, so that we could minimize the negative effects.

In addition, other risks which will result from increased stress, not only in the banking but also in the real sector is when there is negative crediting, decrease in exports and lack of investment. Because of the insecurity and the threat of the growing crisis, the majority of people and businesses will restrict any development initiatives. This risk can be controlled only through a strong national program and predictability in the economic development of Bulgaria.