Debt Default: Bulgaria

Assoc. Prof. Martin Ivanov Bulgarian Academy of Sciences and Bulgarian National Archive Debt Default: Bulgaria

Bulgarian Debt Crisis • 20 years after 1989: communist nostalgia: • It is human to romanticize the past (Plato) • Emotional youthful memories (even with traumatic experiences as military service) • Selective memory of 2000s & 2010s: “cheap bread” and “unemployment free society” • This paper will try to present a more complex picture of Bulgarian centrally planned economy through the lenses of the foreign debt

The First Debt Crisis, 1956-64 • Since mid-1950s Bulgaria intensified its trade with the West • For investment purposes (industrialisation) • For consumption purposes (Malenkov’s drive towards consumption) • Within 5 years (1955-9) Bulgaria incurred a 1 b. leva ( $ 150 m.) deficit on its current account (half of which in 1959) • Backwardness, CPE:  poor quality export

The First Debt Crisis, 1956-64 • The deficit was funded mainly through short-term credits from • Banque commerciale pour l’Europe de Nord (Oerobank) • Moscow Narodny Bank • The debt grew from $ 45 m. in 1954 to $ 200 m. in 1963

Debt Estimates, m. USD, 1950-64

The First Debt Crisis, 1956-64 • This was the first debt crisis for the communist regime in Bulgaria: no tradition in debt reconciliation • Bulgaria played the ‘brotherhood card’ approaching its ‘western’ creditors. They, however, were reluctant to forgive BG debts. • Short-term bridging credits were received from the Soviet and the Czechoslovak National Banks • Funds of marginal size came also from Belgian, W. German, Swedish and Danish banks ($ 10 m.) in 1960-1

The First Debt Crisis, 1956-64 • Moscow unwilling to act as LOLR  selling of gold reserve seemed as the only available option • 1962-63 Bulgaria had to sell almost its entire gold reserve of 5.9 metric tons of gold • Operation brought $ 45 m. and the outstanding debt was agreed to be paid in kind with additional export of: • 100,000 tons of sugar; 1,000 tons of zinc; 3,000 tons of frozen chicken; 500 tons of cheese; 20 m. eggs

The Second Debt Crisis, 1973-8 • Yom Kippur War, 1973 and the oil shock (OPEC embargo) • Oil shock led to price increase by 70 percent and deep recession • The Soviet oil-price umbrella • Until 1974 no change • Until 1978 prices still under wmp • Instead of reorganisation, BG economy continued to be 20-25 percent more energy consuming than the other industrialized countries

The Second Debt Crisis, 1973-8 • Bulgarian overstretch: $ 700 m BoP deficit in 1974 reaching $ 1.3 b. in 1975 • To finance it Bulgaria had either to slash growth (investments) or consumption • Instead Sofia opted for a growth-cum-debt solution • Between 1973 and 1978 foreign debt increased 5 times: from USD 1.3 to 6.1 b.

The Second Debt Crisis, 1973-8 • By late 1976 it became apparent that Bulgarian economy is unable to productively invest these funds. • Foreign banks: reluctant to lend new money • Possible solutions were again: • Slash investment (arrest import, economic reforms) • Slash consumption • LOLR (Moscow)

The Second Debt Crisis, 1973-8 • Sofia attempted modest economic reforms and slightly reduced the growth rates • Soviet by-pass: during the traditional meeting with Brezhnev at his Crimean residence Zhivkov managed extract crucial promise for support: • $ 400 m. annual subsidies to Bulgarian agriculture • New credits • Additional quantities of Soviet petrol earmarked for re-export to the West • Thanks to this generous Soviet support within 6 years Bulgaria was able to reduced its debt from $ 6 to just 1.5 b.

The Best Boy in the Class

The Third Debt Crisis, 1985-90 • Triggered by exogenous shock but with deep systematic roots • US depreciation ( $ 1 = 3 DM to $ 1 = 1.90 DM) worsening of TOT • Most of Bulgarian trade with the West was in DM which effectively meant that export became 38 percent cheaper and import 38 percent more expensive • Bulgarian foreign reserve of $ 1.4 b. also depreciated by 38 percent • Oil prices collapse by 60 percent and the re-export of Soviet oil became far less lucrative. BG incurred losses of $ 300-500 m. annually according to BNB governor Kolarov

The Third Debt Crisis, 1985-90 • Dollar depreciation put most of the oil exporting countries on their knees. • Many of them had recently contracted large credits for rearmament from Bulgaria (Iraq, Libya, Nigeria). • Total Bulgarian exposure to the Arab world was $ 2.5 b.

Friends in Need

The Third Debt Crisis, 1985-90 • Available options: • Slash investment • Slash consumption • LOLR

The Third Debt Crisis, 1985-90 • Soviet debt-umbrella was not available any more. • Instead Moscow call off its claims and Sofia had to transfer $ 650 m. annually in 1988 and 1989 • Generous oil shipments from USSR were a history  re-export was impossible • When Kremlin refused to be LOLR Sofia approached the western banks. • Most of them extended short-term credits at high interest rates • Bulgaria started building up a debt of $ 1.5 b. annually •  Debt overhang: in 1988-90 Bulgarian export was approx. $ 3 b. and the debt transfer was $ 2.5-3 b.

The Third Debt Crisis, 1985-90 • Furthermore, new funds were misused: • 1984-9 debt grew by a factor of 3.6 • GDP grew by a factor of 1.1 • Fixed investments grew by a factor of 1.3 • Foreign reserves were the last line of defense: within 18 month (1987-88) reserves were depleted by 50 percent ($ 1.2 to 0.6 b.) • Forced migration of Bulgarian Turks in the summer of 1989 only aggravated the grim situation • The Economist wrote about the “disintegrating Bulgarian economy”

The Third Debt Crisis, 1985-90 • By late 1988 Bulgarian communist were facing only 2 options: • Consumption squeeze (Chauchesku)  risking social unrest and possibly revolution • Debt default (declared in March 1990)

Exogenous vs. Endogenous Shocks • Chronic trade deficit problems were only aggravated by external shocks • Christina Zloch-Christy: “deep systemic roots” • Endogenous economic imbalances of the centrally planned economies were stemming from the need: • To finance the chronic trade deficit with the West • To import consumption goods • Ineffective investment of the foreign credits

(1) Chronic Trade Deficit • ‘Import hunger’ (Kornai, 1981) of growth oriented CPEs • due to the ‘economy of the deficit’: many products were simply not produced or produced in insufficient quantity and quality • to sustain their growth strategies CPEs had to import technologies and materials from the West • Export impotence: • poor quality, • low technology, • inelastic price structure • missing incentives on micro level

(2) Import of Consumption Goods • Heavy industry was always the beloved child of east-block countries at the expense of the squeezed consumption • ‘Consumption revolution’ from 1960s made economic structure obsolete • CPEs industries could not carter this new trend towards mass consumption

Inefficient Investments

(3) Ineffective Investments • Heavy Engineering Complex at Radomir • Soviet experts proved its ineffectiveness • Despite Soviet warnings Zhivkov gave it a go • Expensive equipment stayed misused for years • Total investment bill: 1.4 b. leva • “Soft budget constraints” and subsidies instead of competition and bankruptcy law

Debt Default: Bulgaria