Peter Andronov: Our chances of entering ERM-2 soon are very high

Banks in Bulgaria are well prepared for membership of the Banking Union

Bulgaria is ready to enter the ERM-2 and respectively the Eurozone as the country have stacked a number of years of stable figures when it comes to membership criteria for the monetary union. Furthermore, Bulgaria is among the best in the EU based on indicators like public debt. The Eurozone paid a heavy price for its political benevolence and naivety, so now the political decision goes through nothing but solid macroeconomic parameters of the applying country, Petar Andronov, Chairman of the Association of Banks in Bulgaria (ABB), says.

Mr Andronov, Bulgaria is on the verge of entering ERM-2, the “waiting room” of the Eurozone. Is the country's economy prepared for that step?

We have stacked a number of years of stable figures when it comes to membership criteria for the monetary union. Furthermore, we are among the best in the EU based on indicators like public debt. In the past, countries with not only worse indicators than ours but even failing to meet benchmarks were acceded. The Eurozone paid a heavy price for its political benevolence and naivety, so now the political decision goes through nothing but solid macroeconomic parameters of the applying country. Without being specified as criteria, gross domestic product and the wealth of Bulgarians are those factors that put us behind the average European. However, ERM-2 membership is not a sprint with a cut-off date; this quest can take a long time, during which our economy will continue to converge with that of the Eurozone.

Concerns have emerged lately over a possible change to the exchange rate of Bulgaria's currency, the lev. What is your take on the matter?

I have no such concerns. Neither the legislative measures undertaken recently by the National Assembly allow for this to happen, nor does anyone in the country have any intention of doing this.

Do you see it as a possibility for Bulgaria to be pressured to change the current exchange rate of the lev against the euro before joining the monetary union?

No. For that to happen, the market has to offer another lev-to-euro exchange rate that makes more sense than the existing one because that is the rate used for the bulk of deals struck in euros and levs. And there is no other exchange rate than the BGN 1.95583 for €1 - all transactions are done using this rate or one almost identical to it. If you are asking about joining the Eurozone, the same logic applies. Under ERM-2 rules, the scenario you describe can take place only if the national currency deviates more than 15% from its assigned value, one way or the other, and deals are executed at very different exchange rates. As we intend to keep the current fixed rate, i.e. the currency board, also while we participate in ERM-2, that is a practically impossible scenario. Nothing short of dramatic, cataclysmic changes and shifts in our economy could create rationale for a different exchange rate. But those have to be so sweeping as to necessitate a correction irrespective of whether we are in the “waiting room” of the Eurozone or not. We have seen a lot of crises and shifts over the past 23 years, but the currency board and the fixed rate have never wavered.

Is it possible that the aspirations for devaluing the Bulgarian currency are stoked by people with large loans in levs?

There is no substance to such assertions. The implication is that someone wants to devalue a loan and - in order to achieve that - is willing and capable of getting us in the Eurozone. This is a conspiracy theory. The reality is that Bulgaria stated its wish to become a member 15 years ago, and as an EU country we have the obligation to strive for this. And we have never been in a better position to reach this goal than we are now. I am not strictly referring to our macroeconomic indicators, which have been solid in previous years as well, but also to the palpable support we feel from Europe right now to make this step. Let us not forget that political will is the deciding factor for a country's accession to the Eurozone.

Does the euro give us a chance to stop being a second-class Member State?

Yes, but it is not a guarantee in and of itself. If we adopt the euro and then sit on our hands, we will remain a second-class Member State. The euro will help and protect us, but only if we keep working hard and stay committed to reforming our economy in a sustainable way, with vision for the future.

What positives and negatives for regular people will arise from adopting the euro? It is said that introducing the single currency always leads to a spike in prices.

The claims about price hikes are overblown. Let us make this clear, we are talking about the immediate inflation triggered by the replacement of national currencies with the euro, which is mostly due to rounding up numbers. The history of the Eurozone shows that economies of countries that have adopted the single currency continue to develop at the same pace and with the same issues. The act of adopting the euro cannot instantly and radically alter the internal dynamics and market balance of an economy. Adopting the euro will have numerous benefits for businesses and for regular citizens in Bulgaria. Companies will save between €60m and €100m annually thanks to no longer having to convert levs to euros and vice versa. Another big plus for everyone will be even cheaper borrowing. Statistics show that out of the top eight countries with most expensive mortgage loans in the EU, six are not members of the Eurozone. This is why bank profits are much higher in non-Eurozone Member States compared to those of lenders in the monetary union. A good example is the contrast between profitability ratios of banks in the Czech Republic and Slovakia, the latter of which uses the euro. Czech banks profit from more expensive loans and transaction fees charged for converting currencies.

Following this line of thinking, banks should be against the Eurozone, but the single currency brings stability and reduces opportunities for exploiting people's fears, which makes paying this price worthwhile. Of course, Eurozone membership also helps with credit ratings, contributes to a better protection of the banking sector and sends a clear message about the geopolitical course of a country, among other positives. Naturally, membership also means sharing the Eurozone risks, but we are largely dealing with those as it is, because of the currency board.

Where does Bulgaria rank in terms of share of bad household and business loans?

Unfortunately, we are in the top five in the EU based on this criterion. The share is about 7%, compared to below 3% on average for the bloc. However, the share of bad loans in Bulgaria dropped quickly from its highest levels years ago. It is down almost 1% in the past year. We are gradually approaching the EU average.

Is our banking system ready for the Eurozone? Are more reforms needed?

As part of the preparation for candidacy and in accordance with a programme coordinated in advance, the European authorities evaluated the banking sector by assessing the quality of assets and stress tests and taking a look at bank legislation and the central regulator, the Bulgarian National Bank (BNB). The conclusions were revealed, legislative changes were made, and BNB was commended for its rules and procedures. It is abundantly clear that the banking system in Bulgaria is in no worse condition than those of most Member States, and more specifically of Eurozone members. The capital adequacy of Bulgarian banks, which is the reserve of capital intended to make up for bad loans, is among the highest in the EU at over 19%, which ranks ninth. The reforms required by the EU are not limited to banks. I assume that Bulgarian authorities have seen progress in all other examined areas, given that an invitation to ERM-2 is now on the agenda.

Is there a risk of another collapse similar to that of CorpBank?

As I mentioned, we have been through two assessments of asset quality - in 2016 and 2019. The first one was conducted by BNB using the European Central Bank (ECB) methodology. The second one was carried out by the ECB itself. The results have been made public. If there was a danger of another CorpBank case, you would have heard about it by now.

Do low interest rates entail risks?

Yes, if low rates lead to overestimating the financial capacity of borrowers. But over the years, people and companies have learnt to be more careful, and nowadays when they take out loans, the low price of crediting is the least of their motivations. At the top of their list of reasons are their present needs, capacity and plans. Low interest rates are dangerous because of the resulting narrowed scope of risk assessment. In the extremely tight modern interest rate margins, banks need to find room for evaluating both the soundest and the riskiest loan applicants. The capacity to accurately evaluate the risk presented by a variety of clients has been undermined. This is something we also see with the funding of states. Today we are witnessing some absurd situations, where loans are extended at negative interest rates to economies that were considered insolvent until a few years ago.

Will the trend of bank consolidation in Bulgaria continue?

This process has been ongoing because it is stimulated by a drive for efficiency. Larger scale allows for lower fixed costs. Consolidation of assets has always been a major driving force of capitalism and that applies to all areas of the economy, not just the financial one. For several years now, there has been talk of consolidation in the banking sector at the EU level. It is long overdue, actually, because the European banks are still small and cannot compete with the big US banks, which have consolidated pretty intensively. Banks on the other side of the Atlantic operate in a huge market and are much stronger and more stable and therefore more effective. This is why investors in bank stocks prefer American banks.

How will the UK leaving the EU affect the bloc's banking system?

We do not anticipate that Brexit will have major consequences for Bulgaria because our banking sector is not that tightly linked to the British. Our trade relations with the UK are also not that active. The expectation is that the future trade agreement (between the EU and the UK) will limit the negative effects from Brexit for both businesses and the banking sector.

Close-up

Peter Andronov has been serving as chairman of the Association of Banks in Bulgaria (ABB) since March 2015. He has been the chief executive officer and chairman of the Management Board of United Bulgarian Bank (UBB) since 2017 and manager of KBG Group for Bulgaria since March 2011. He was appointed executive officer of CIBANK in the middle of 2007 and was promoted to chief executive officer following its acquisition by the Belgian KBG at the end of that year. From 1997 until 2007, he served in the Banking Supervision Department of the Bulgarian National Bank, becoming deputy governor responsible for that department, in 2002.

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