In late 1996,
Corruption, patronage, and self-dealing among Bulgarian banks and politicians became visible to the world. The deterioration of the financial system was matched only by Bulgarians' deteriorating confidence in their government. As pensioners lined up around the block for access to their deposits, protests and riots swelled, leading to the collapse of the socialist-led government.
Following an unexpected result in European Parliament elections on
Anonymous text messages were broadcast claiming insolvency at
Admirably, K.T.B. honored the withdrawal requests. It then promptly requested that the B.N.B. place it in conservatorship to prevent a total collapse.
Signs of a spreading crisis soon appeared when the central bank had to step in to prevent a run on
The government and the B.N.B. pledged to conduct an independent audit and protect depositors and bondholders, even if it meant issuing new debt to guarantee the stability of the banking system. After all, the B.N.B.'s credibility was at stake: Only a few months earlier, it had given K.T.B. a clean bill of health in order to facilitate the purchase of a local subsidiary of a foreign bank.
International investors and local depositors largely saw this as a swift and effective reaction to what was likely a fabricated crisis.
Then the real drama began. When an independent audit showed massive gaps in the banks' records and malfeasance at multiple levels, the accusations reached a fever pitch.
Vassilev called into question the reliability of the audit given the obvious discrepancy with the previous audit. The prosecutor general accused B.N.B. officials of complicity. Others demanded to know why government could not produce required duplicates of bank records.
Each political party came up with a solution and then changed its position repeatedly, using the crisis to either score political points or cover up misdeeds. What began as an easily containable problem has turned into a political circus. All the while, K.T.B.'s doors remain closed, and depositors and creditors alike are left in the dark.
This mismanagement has called into question whether
Politicians created this problem, and they must fix it. Unfortunately, this is complicated by the fact that a snap election is scheduled for October. The ruling coalition collapsed earlier this month, and in its place emerged a shifting and loose alliance made up of parties from the last government and the opposition. Everything is being handled behind closed doors.
The problem is easy to solve at this early stage, but will take the same sort of decisive action as was necessary in 1997. And the good news is, the latest B.N.B. audit of K.T.B, released on
There are two routes that would immediately restore confidence. First, the government or shareholders could provide the necessary capital backstop and depositors' insurance to ensure that customers and creditors are protected, allowing the bank to promptly reopen without fears of a run or lawsuits.
The second route would be to move the healthy assets and liabilities to a "good bank," which would be promptly reopened, and to isolate the alleged "bad" loans and business activities to be dealt with through the full force of the law.
Failure to take one of these routes will make it clear that
This article first appeared in www.themarknews.com
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