Bulgaria Reluctant to Seek ECB Scrutiny Before Euro Entry

(Bloomberg) -- Bulgaria, which is seeking to cement its path to euro adoption this year, said it has no plans to join Europe’s banking union before switching to the common currency.

The Balkan nation wants to join the exchange-rate mechanism -- the waiting room for euro adoption -- this summer. While becoming a member of the union before entering the euro area could help allay concerns over banking transparency in the wake of money-laundering scandals elsewhere in eastern Europe, such a step isn’t on the cards.

Bulgaria “is working actively for accession to ERM-2, which is the first step to continuing with simultaneous membership of the euro zone and the banking union,” the Finance Ministry said in an emailed response to Bloomberg questions.

While the country’s bid to become the euro region’s 20th member has garnered support from the leaders of Germany and France, the European Central Bank sees its lenders as a key concern, according to two people familiar with the discussions. News from Latvia -- whose No. 3 bank was closed by the ECB amid U.S. accusations it handled illicit cash, and whose central bank governor is fighting a bribery probe -- has complicated Bulgaria’s plans.

Efforts to place its banks under ECB supervision have stalled since 2014, when the government initially sought to join the Single Supervisory Mechanism amid the worst banking crisis in 17 years.

Stress tests two years later showed the financial system to be stable. Even so, there were “pockets of weaknesses,’’ according to the European Commission, as two domestically owned banks of the country’s 22 lenders needed to replenish their capital, including First Investment Bank, the third-biggest.

“The events in Bulgaria and lately in Latvia, after the banking crisis there, show that as an economy and as a country Bulgaria will benefit from the banking union,” Lyubomir Mitov, a UniCredit SpA consultant based in Washington D.C., said Wednesday by phone. “Control over lenders’ supervision and their regulation will be partly moved out of the country and monitored externally.”

The European Union’s poorest state by per-capita output ticks all the economic boxes for ERM-2 entry. Its national currency, the lev, is already pegged to the euro, public debt is well below the euro-area average and the EU cap, and the nation runs a budget surplus. Approval has become a matter of political will from the bloc’s authorities.

It’s possible to join the banking union, set up as a response to the euro-zone crisis, without being a member of the currency bloc, according to Raffaella Tenconi, chief economist at ADA Economics Ltd in London. Such a move would hand the power for supervision of systemically important lenders and their possible wind-up in the event of crises to the ECB. It would also greatly reduce government influence in the sector.

ECB supervision would “provide additional guarantees” that bank crises like Corporate Commercial Bank AD’s 2014 collapse won’t happen again, according to Daniel Gros, director of the Center for the European Policy Studies in Brussels. Local regulators didn’t spot the problems early enough, though the central bank has since improved its operations “considerably,” he said.

To contact the reporters on this story: Elizabeth Konstantinova in Sofia at ekonstantino@bloomberg.net, Slav Okov in Sofia at sokov@bloomberg.net.

To contact the editors responsible for this story: Scott Rose at rrose10@bloomberg.net, Andrew Langley, Balazs Penz

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