Bulgaria is pushing ahead to join the pre-euro currency club, the Exchange Rate Mechanism – known as ERM2 - next year, the country’s deputy prime minister has said.
“In my opinion 2011 is a feasible target for us joining the ERM2 and we will aim at it,” Simeon Djankov told Emerging Markets. The mechanism is the requirement for a country to lock its currency into a narrow trading band with the euro for at least two years before joining the common currency.
This time last year, the government pleaded to EU authorities to fast track its entry into the ERM2, seeking shelter from the storm ravaging the Balkan economy. Asked whether renewed market turbulence in the eurozone could once again derail this ambition, he said: “Undoubtedly, it would be more difficult, but this should make us even more ambitious and daring, because everyone is aware that the criteria won’t become easier.”
Bulgaria already operates in a currency board regime, under which the lev is pegged to the euro, and is obliged to keep a fiscal reserve to contain inflation. Bulgaria’s budget deficit will reach 2.8% of gross domestic product (GDP) this year – in line with EU rules – after 3.9% in 2009, according to a European Commission forecast.
In a sign of growing fears within eurozone accession candidates that in the wake of the Greek debt crisis Western Europe would be more rigorous in enforcing euro convergence rule, the so-called Maastricht criteria, Djankov said: “At the moment none of the euro area member states meets the Maastricht criteria. It is important that the conclusions drawn from the present situation should be applied fairly to all countries – both members and candidates.”
Bulgarian deputy central bank governor Dimitar Kostov said the country would be ready to join ERM2 next year but urged vigilance. “We need to have more clarity on the progress of the recovery from the global financial and economic crisis as well as on the progress in tackling excess deficits in a number of EU countries, most notably Greece.”
In other comments, Djankov quashed fears that the Greek fiscal crisis would force Greek banks – which account for nearly 30% of banks’ assets in Bulgaria – to wind down their operations in the country. “At the moment we have sufficient guarantees that the Greek banks in Bulgaria are sound.”
Greek banks – all but one – represent locally incorporated banks and are thus, subject to central bank supervision. As a result, foreign parents would be unable to withdraw their contributions to bank capital abruptly as they would need to be in compliance with liquidity regulations, Djankov said.
He added: “They are among the banks with the best capital adequacy and indicators at the moment,” Kostov said. “The Bulgarian banks managed to attract significant domestic resources and were able to compensate the decrease in funds from parent banks and non-residents by the end of the year.”
He said ECB liquidity injections announced this week had helped to “reduce the speculation about possible capital withdrawal from the foreign bank subsidiaries in Eastern Europe.”