Cause and Effect in European Politics and Law

Industry Watch: The debt crisis in the euro area does not affect Bulgaria for now

Adelina Marini, January 7, 2011

Just days before the European Council in Brussels, which was expected to find a solution to the debt crisis in the euro area, the analyst company Industry Watch made the first in Bulgaria analysis on the situation in the peripheral economies in the euro area and their connection to Bulgaria. According to the analysis, in the end of last year fears have increased that new fiscal crises might emerge in Portugal, Spain, Italy and other indebted countries. The European debt crisis that hit Greece first and then Ireland, has an indirect impact on population's finances in terms of holding interest rates on loans and savings relatively high, cheaper euro vs. the dollar, as well as the prices of major raw materials which led to decrease of households' purchasing power, measured in dollars.

The reason why Industry Watch's analysts do not see a problem for Bulgaria is that unlike other countries, like Italy, the Bulgarians do not have direct investments in state bonds of some of the potentially endangered EU member states. This is why the outbreak of new debt crises in the euro area would have a rather limited indirect effect on Bulgarian households' financial health.

Furthermore, Bulgarian households, unlike the European ones, at least for now, are not interested in actively managed wealth (in mutual or voluntary pension funds) which have higher risk but also higher (expected) profitability. Meanwhile, there is a growing interest in international financial markets and investments in foreign mutual funds, the analysts say.

Besides, Industry Watch points out several other facts that signal a relative financial stability. Bulgarians' financial wealth is growing with approximately 4 bn levs (2.05 bn euros) exceeding 38 bn levs (19.48 bn euros) by the end of September 2010. The double rate increase of wealth (11% per year) is due to a jump of all items in the financial portfolio of households (excluding bonds).

In spite of the decline of interest rates on savings, bank savings continue to grow. Households strive to ensure a larger buffer of savings in case they lose their monthly income (from wages, rent, money transfers from abroad). The bad news is, however, that the situation at the labour market remains unstable as the decline in unemployment in the last few months is more or less due to season work than to a stable trend. Instead, although on national level prices are still falling, in Sofia there is a rise of property prices for the first time in two years - with over 2% compared to the second quarter of 2010. By the way, the real estate market in Bulgaria proved a big bubble too, the bust of which has ended the several-years' economic growth of the country.

An upward trend of real estate prices in the Bulgarian capital would probably continue with modest pace in next quarters too, the analysts from the company forecast by adding that house loans become more and more accessible. The potential of expansion of mortgage financing is big. In Bulgaria only 9% of the value of all houses is being funded by a bank loan which is almost 4 times less than in developed European countries like Austria for example.

This analysis of Industry Watch could be optimistic in some of its aspects but it must be noted that the debt crisis in the euro area, except from being caused by the peripheral economies' huge debts, was also due to the collapse of investors' confidence - a phenomenon that is yet to be studied in terms of reasons. And, although there are short-term benefits from the closeness of the economy, in the longer term the fact that Bulgaria will remain sheltered dooms the country to weak economic development.