Bulgaria's FinMin: Euro Adoption Not Yet Off the Table

Finance Minister Simeon Djankov has insisted he would ensure the stability of Bulgaria's currency and banking system, but doing so will require a tight fiscal policy, even though Bulgarian GDP contracted by almost 6% last year. Photo by BGNES

Bulgaria's planned application to join ERM II, the exchange-rate mechanism that aspiring euro-zone members must join before adopting the common currency, was "not yet off the table" although chances "now are a lot dimmer," the finance minister has said.

Speaking in an interview for Wall Street Journal, Minister Simeon Djankov said about a third of the 2009 budget deficit consisted of one-off items that can technically be overlooked in the ERM II application process, leaving Bulgaria within the fiscal limits.

The news came shortly after the minister said the country would double its previously reported budget deficits for 2009 to 3.7% of gross domestic product over newly revealed budget data that show a host of unfunded liabilities.

"The country had cast itself as a paragon of fiscal rigor, running up consistent budget surpluses—required to bolster its peg of the lev to the euro through a currency board—and running only a modest deficit during European recession that began last year,“ the Wall Street Journal comments.

The budget revelation "is certainly something that is going to raise skepticism especially given the Greek issue," said Simon Quijano-Evans, a strategist at Credit Agricole brokerage Cheuvreux in Vienna.

He warned that spreads on credit-default swaps on Bulgarian national debt—essentially the cost of insuring against a default—will probably come under pressure, with a spillover effect possible for Romania and even Hungary.

Djankov said he was "happy our banking sector is fairly ring-fenced" and insisted Bulgaria's weak trade ties with Greece should protect it from the financial turmoil in Greece.

Doubts about Bulgaria's budget were first raised by prosecutors investigating more than two billion levs in additional but unpaid costs on a slew of government contracts in 2008 and 2009.

Djankov insisted he would ensure the stability of Bulgaria's currency and banking system, but doing so will require a tight fiscal policy, even though Bulgarian GDP contracted by almost 6% last year.

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