ECB's `Serious Concerns' Aim to Cool Bulgaria's Euro Plans

(Bloomberg) -- The European Central Bank poured cold water on Bulgaria’s goal of entering the waiting room for euro membership this year, saying the Balkan country must first strengthen financial oversight and the economy.

With low public debt, a budget surplus and a currency that’s already pegged to the euro, Bulgaria fulfills the formal criteria for joining the single currency, drawing praise from the European Commission for its preparations. But the ECB said Wednesday in a report that there are “serious concerns” over governance and the long-term sustainability of inflation convergence as the European Union’s poorest member strives to overcome the wealth chasm with other euro-area nations.

“Countries adopting the euro should be able to demonstrate the sustainability of their convergence process,” the ECB said. “An appropriate framework for the supervision and resolution of financial institutions needs to be in place, especially in view of the establishment of a banking union and the Single Supervisory Mechanism.”

ECB's `Serious Concerns' Aim to Cool Bulgaria's Euro Plans

Bulgaria wants to become the 20th member of the euro region and is using the EU’s rotating presidency to advance plans to join the ERM-2 exchange-rate mechanism, a two-year process that precedes adoption of the single currency. While its aspirations have received backing from German Chancellor Angela Merkel and French President Emmanuel Macron, the ECB has been less enthusiastic, particularly after banking scandals elsewhere in Europe’s east.

ECB Executive Board member Benoit Coeure, along with EU officials, delivered a preliminary assessment on Bulgaria’s plans on Wednesday in Sofia, the capital. Entry into the ERM-2 must be approved by the finance ministers and central bankers of the euro area plus Denmark. It offers a chance to exert pressure on countries before euro membership.

“Bulgaria already fulfills the nominal Maastricht criteria related to price stability, public finances and convergence of long-term interest rates,” European Commission Vice President Valdis Dombrovskis said Wednesday in a statement. “We welcome the Bulgarian authorities’ current work toward Exchange-Rate Mechanism participation to meet also the exchange-rate stability criteria.”

Greater Scrutiny

The yield on Bulgaria’s euro-denominated bonds maturing in September 2024 fell one basis point to 0.766 percent, the lowest since January 26, at 5:59 p.m. in Sofia.

The first nation to begin pushing for euro entry since the euro-area debt crisis and since the ECB assumed oversight of the region’s biggest banks, Bulgaria has rejected suggestions it should face greater scrutiny than previous entrants.

Finance Minister Vladislav Goranov said last month that Bulgarian banks won’t accept ECB supervision -- which could take a year or more to set up if there are serious issues with the financial sector -- before applying for ERM-2. Prime Minister Boyko Borissov signaled last week that he’d avoid a confrontation over the euro bid, saying current members have justifiable concerns about enlargement.

‘Significant Risk’

While Bulgarian stress tests in 2016 showed banks had recovered from a crisis two years earlier, the ECB said more work needs to be done.

“Credit risk is still a significant risk to financial stability, with non-performing loans to the non-financial corporations sector being still elevated,” the ECB said.

Bulgaria also needs to step up “structural reforms to enhance the business and institutional environment” to attract foreign direct investment and raise potential growth, the ECB said. “These include significantly reducing corruption, ensuring an independent and effective judicial system and enhancing the education system.” Bulgarian law doesn’t comply with all the requirements for central bank independence, according to the report.

In addition to Bulgaria, the ECB report covers Croatia and Romania, which also want to adopt the euro, as well as Sweden, Hungary, Poland and the Czech Republic, which have no immediate membership plans despite being bound by EU law to eventually join.

Given the current discussion on euro-area reform, most member states and the ECB “are not really keen on having Bulgaria join,” Carsten Brzeski, chief economist for ING-Diba AG in Frankfurt, said by email. “The ECB, in my view, is already preparing the arguments to keep Bulgaria outside the euro zone for as long as possible.”

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