ECB Gives Thumbs Down to Bulgaria Govt Silver Fund Ideas

The Euro sculpture is seen in front of the European Central Bank (ECB) headquarters in Frankfurt, Germany. Photo by EPA/BGNES

The European Central Bank has strongly advised Bulgaria against investing the assets of the state fund for guaranteeing the stability of the state pension system in domestic assets.

The statement came shortly after the government approved a draft law amending and supplementing the Law on the State fund for guaranteeing the stability of the state pension system, known as the Silver Fund.

Investing up to 70% of the Fund's assets in securities issued or guaranteed by the Republic of Bulgaria, as envisaged by the law, may lead to unequal treatment of the different investment instruments, creating competition and market distortions, ECB said in an official statement, published on its website.

It points out that the draft law does not require an investment grade credit rating to apply to securities issued by the Bulgarian government, whereas the other debt securities do require such a rating, which puts the government in a privileged position compared to other issuers.

"If the Fund purchases the envisaged amounts, exclusively in the primary market or in the secondary market, the prices and yields of Bulgarian government securities will not reflect the true state of the Bulgarian economy and the position of the country's public finances," the ECB said in its statement.

In addition, some investors might stop participating in a debt securities market dominated by a public sector fund, which is under the control of the issuer. This would reduce the depth and liquidity of this market, according to the bank.

The ECB notes that the assessment on Bulgaria is obliged to fulfill the criterion related to long-term interest-rate levels and its progressed is being closely monitored.

The potential distortion of this market, as a result of the predominant participation of the Fund acquiring high volume of government securities on a small market with low liquidity could undermine the credibility and accuracy of the fulfillment of the long-term interest rates criterion, according to the bank.

Bulgaria's central bank BNB has also vehemently criticized the draft law, saying it puts at risk the already accumulated funds, as well as the country's financial stability.

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