Greek Crisis: Is Bulgaria Safe?
This post was first published in Stara Planina Properties newsletter on 4th November 2011.
It has been over a year since the problems in Greece concentrated the attention of the European leaders. Since this point in time there has not been a single month without news of plans being drawn about rescue of Greece and Euro currency from the threatening storm.
The problems of Greece came from spending more money than the government was collecting from taxes for long period. The deficit was funded by borrowing money from foreign banks (mainly French and German) through issuing state obligations. Thus the state debt increased to an amount which could not be paid off anymore. In 2010 the Greek government was put under pressure to start reforms in order to save money and start paying off the debt. The EU would help by giving additional funds for reasonable amount of time whilst Greek economy was cured from the proportionally very high state expenditures. However Greek government faced the resistance of their own people to part with the benefits of the past. Strikes of state servants and workers of various industries in Athens and most big cities were a daily occurrence. People simply want to continue to live la dolce vita without changing any of their attitudes.
Compared to the above Bulgaria is completely different case. Following a severe bank crisis in 1997 the government and Bulgarian National Bank introduced strict rules for state spending and bank capitalisation. Between the years 1998 and 2008 there were budget surpluses (Bulgarian government was spending less money than collecting). Bulgaria has much lower state debt and budget deficit of less than 3%. 2009 was the only year when the budget deficit exceeded this healthy figure going up to just 4%. The restrictions provide confidence in the stable development of the economy but, on the other hand, make life of most Bulgarians hard as majority spend about half of their budget on food and utilities. Bulgarian economy just started in last quarter of 2010 to grow slowly again after the last crisis. Now according to the Bulgarian finance minister Simeon Diankov Bulgaria is safe out of the economic crisis. However this safety is fragile as such a small export oriented economy depends much on the growth in the Western European economies.
What is the impact of the Greek crisis on the Bulgarian economy and what can be expected if the problems deepen? It was again the finance minister Diankov who claimed that the trade between the two countries has decreased significantly and the Greek crisis will not have direct negative impact. However the national statistic shows that Greece is one of Bulgaria’s major export markets (9% of Bulgarian exports in 2010). Being immediate neighbours the two economies are strongly connected. Several Bulgarian banks are owned by Greek banks (comprising about one-third of the market). This does not mean that Bulgarian banks will collapse but if there are problems in Greece, banks will be looking to take back to Greece more funds which means even less credits with higher price for the Bulgarian businesses. Even now credit policies are very restrictive and price of the capital is high. This will put Bulgarian producers in a difficult situation and will make them less flexible; they will not be able to invest in modern technologies and will be less competitive on the international markets. The third direct impact is that large number of Bulgarians work in Greek tourism and services. These people are paid much better than workers on similar positions in Bulgaria. Many of these people send their income back to support their families in Bulgaria. If Greek economy collapses many will lose their jobs and less money will be coming into the Bulgarian economy.
There are other points which are to the positive side. Over 2,000 Greek companies have moved their business to Bulgaria recently fearing the problems in their home land. Some Greeks are looking to invest their savings away from the uncertain banks and quite a few sales have been completed during the summer months in the ski resorts and regions in Southwest Bulgaria with Greek buyers. In addition there has been steady growth of Greek tourists holidaying in Bulgarian winter and spa resorts in the same regions.
It is difficult to predict all the outcomes in a world where economies are so much connected and where relationships are so complex. The world markets already reacted to the news from Athens and Nice and Euro went down compared to the US dollar. If this trend continues fuel prices (which are formed in US dollars) will rise. As a direct result for Bulgarian goods and services for daily consumption such as petrol, electricity, transport, food will be increased too. This will put pressure on the weak domestic demand and put break to the slow growth.
Bulgarians want to believe problems in Greece will be resolved without negative effect on the Bulgarian economy. Naturally fears are connected with lost of jobs and reduced income. There have been enough crises during the last 20 years and life for many seem to have worsen despite the hopes and talks for the bright European future.