Bulgaria is planning to offer five or seven-year Eurobonds on the international capital markets by the end of June. But what if the move fails to raise the money needed to repay debt maturing in a matter of months?
By Svetla Dimitrova for Southeast European Times in Sofia -- 24/04/12
The clock is running on Bulgaria's borrowing and spending. [Reuters]
Bulgaria is planning to float Eurobonds worth up to 1 billion euros on the international capital markets in several weeks to raise the funds it needs to repay debt maturing in January 2013.
The cabinet authorised Finance Minister Simeon Djankov to begin preparations for the move earlier this month.
"The government bonds' markets are extremely sensitive to economic and political events and the opportunities for securing financial resources on favourable terms appear in narrow windows," the government said in a statement. "We are witnessing now a calming down of the international capital markets, which creates a suitable investment environment for attracting external funding."
After that April 4th cabinet meeting, Djankov told reporters that Bulgaria plans to offer five- or seven-year Eurobonds worth 950m euros by the end of June. This, in hopes the country would be able to secure the financing it needs at an interest rate lower than the fixed 7.5% rate it pays on euro-denominated global bonds worth 818.5m euros, maturing on January 15th.
The move, which would mark the first time since 2002 that the country taps international markets, will increase its external debt, which currently tops 3.48 billion euros, or 16% of GDP, making Bulgaria the country with the lowest debt-to-GDP ratio within the EU.
But the step is unavoidable, local economic experts say.
"The level of the country's fiscal reserves has dropped as the government has had to finance the budget deficits it has been facing in recent years," George Angelov, senior economist at the Open Society Institute in Sofia, told SETimes on April 16th. "It will continue to face budget deficits this and next year as well."
Aside from the bond redemption due in early 2013, there are also service payments on Bulgaria's domestic debt, which totaled more than 2.41 billion euros at the end of January, according to a finance ministry report.
"The financing needed for all those payments over the next two years totals about 5.5 billion leva [over 2.8 billion euros], which will be difficult to secure from domestic sources. Given the circumstances, [the decision] to go out on the international markets is logical, even belated," said Angelov.
Lubomir Christoff, a former chief economist of the Bulgarian National Bank, agreed that tapping international capital markets to roll over external debt maturing in early 2013 makes sense.
"Nevertheless, the pressure on the government to bring the budget back in balance remains, and given the periodic turmoil on the Eurobond market, the sooner fiscal balance is restored, the better," he told SETimes.
Two days before the start of the Orthodox Easter holidays on April 13th, Djankov told reporters that his ministry had already sent letters to 11 banks that have been active on the Eurobonds' market in the last three years, inviting them to send their offers. He expected them to respond within a week.
After that, three or four of the banks offering the most favourable conditions, in terms of interest rates and service payments, will be short listed for the next step in the procedure. Djankov also suggested that Bulgaria will pick -- by April 25th -- one or two of them to manage the planned Eurobond issue.
While noting that the international capital markets are calm right now, Angelov cautioned that the situation might change by June or July, when Bulgaria is expected to dive in.
"It is unclear if the financial markets will still be calm and offering good funding terms then. With Spain and Italy under pressure again, and with Greece and France facing elections, the situation might change dramatically," he explained. "In that sense, there is a chance [for Bulgaria] to raise money, but there is also a serious risk of that not happening, or of the terms becoming less favourable."
If Bulgaria fails to raise the needed funding on the international markets, it will have to try to get it from domestic sources, which is unlikely, according to experts. But even if it is successful, such a move would put the economy under pressure.
If all other options are exhausted, the only alternative for Bulgaria would be to turn to the IMF for securing the needed financial resources. But, that has certain downsides, and will send "a negative signal" that the government cannot handle the situation on its own, according to Angelov.
"Besides, confidence in the IMF programmes has been seriously undermined by the Greek case, which showed that programmes imposed by outside sources are not always effective," he said. "In any case, if the [Bulgarian] government fails to secure the needed financing on its own, the confidence in the country will drop, which will have a negative effect on investments and the economy."
In the event Bulgaria is able to raise the funding for the January debt payment, avoiding the IMF scenario, it might find itself in a similar situation ahead of another debt payment worth over $1 billion, maturing in 2015.
This makes it even more important for the government to focus its efforts on bringing the budget back in balance in 2013, or even better -- this year, according to Luchezar Bogdanov, an analyst with the Sofia-based Industry Watch consulting company.
"That would send a clear signal about the country's fiscal stability and would thus allow it to borrow money much more easily in the future, and on better terms," Bogdanov told SETimes.