Bulgaria Replies to ECB to Defend Silver Fund Changes

Bulgaria’s Finance Minister Simeon Djankov ia pictured here in parliament. Photo by Sofia Photo Agency

Bulgaria's finance minister has made an attempt to defend the proposed changes to the state fund for guaranteeing the stability of the state pension system, criticized by the European Central Bank.

The investments of the fund's resources into Bulgarian government securities (GS) will be made in stages if this opportunity should be availed of, Finance Minister Simeon Djankov wrote in his letter to ECB President Mario Draghi on Wednesday.

In 2012 the Fund will not be allowed to invest more than 30% of its assets in Bulgarian GS, while this restriction on investments is to be increased in steps every following year by 10% until 2017, according to the letter.

Minister Djankov cites the example of some EU member states, such as Belgium, which foresee the issuing of special GS for the fund purposes that are untradeable.

"The approach adopted for those untradeable GS issues does not require an investment grade credit rating," he says.

Earlier in the day the European Central Bank issued an official statement, strongly advising Bulgaria against investing the assets of the state fund for guaranteeing the stability of the state pension system in domestic assets.

The bank pointed 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 and could distort the market.

"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.

According to Bulgaria's finance minister, however, the yield of the issues issued for the Fund's purposes will be determined on a market basis following the main benchmarks.

"The maturities of those issues will be consistent with the forecasts for the needs of transfers from the Fund to the State Social Insurance," Djankov explains in his letter.

"The terms and conditions of individual issues are not subject to legislative regulation and will be set forth in the Fund's Investment Strategy."

The finance minister points out that investing Fund resources in special issues of GS will be neutral in terms of the volume and the yield of the standardized issues of GS.

Djankov recalls that the average weighted yield at the recently held auctions has dropped to 4.95 %, the lowest yield recorded since 2008 in this maturity segment

He also points out that the outcome of the auction for the sale of 10-year bonds, held in March, corresponds to the data published by ECB on 13 April 2012 on the harmonized long-term interest rate for evaluation of the level of convergence of all EU member states.

The exchange of letters 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.

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.