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Bulgaria: Bankers' Arrest Puts Financial 'Black Hole' In Spotlight

Prague, 11 April 1997 (RFE/RL) - The arrest of six Bulgarian bankers in Sofia this week is seen in international financial circles as a sign that Sofia's caretaker cabinet is striking at the heart of the country's corrupt financial circles.

The bankers, all board members of the insolvent state-owned Mineral Bank, are charged with granting illegal loans between 1992 and 1995 that have accrued to more than 100,000 million lev. At today's forex rate, that figure represents about $65 million. But calculated at the exchange rate for the period when the money was disbursed, the original loan principals may have been worth as much as $1 billion.

Three of the bankers are in jail and three others were put under police surveillance after posting bail. Among those posting bail is former Bulgarian National Bank Deputy Governor Emil Hursev, who resigned from his post in 1993 to go into private business.

Bulgaria's Chief Prosecutor Ivan Tatarchev yesterday said Hursev's private consultancy, Hursev and Co., is among more than a dozen private companies that received dubious loans from Mineral Bank and have not been repaying the money. The announcement raises questions of conflict of interest by board members of Bulgarian state banks.

EvroEnergy Holding, a firm linked to former Socialist Party parliamentary group leader Krassimir Premyanov, also was listed by the prosecutor as a firm that is not servicing Mineral Bank loans.

In a telephone interview with RFE/RL, Hursev dismissed the charges against him as "politically motivated" ahead of the April 19 parliamentary elections. Hursev also rejected accusations of mismanagement. He blamed the former government of Socialist Prime Minister Zhan Videnov for the collapse of Bulgaria's banking sector.

But critics say court charges that Hursev helped siphon off state funds explain why he is one of the most outspoken critics of a proposed currency board regime in Sofia.

The currency board is recommended by the International Monetary Fund (IMF) as a way to establish fiscal responsibility. It would peg Bulgaria's lev against the country's hard currency reserves, greatly reducing the ability of the National Bank to manipulate foreign exchange rates. More importantly, the currency board would stop the financial cycle that has allowed Bulgarian commercial banks to continue draining state money through government bailouts.

World Bank officials in Sofia have charged that many loans granted by state and private banks since 1992 were given to the friends and business associates of bank managers. A former Sofia representative of the World Bank, John Wilton, says such loans were being dispersed despite the fact that those receiving the money did not have the ability or intention to repay.

The National Bank last year also noted a dangerous trend that contributed to the collapse of the banking sector -- the shuffling of large sums of money between banks. In some cases, the same money was recycled several times so that a group of banks could meet their minimum startup capital requirements. The practice made Bulgaria's banking sector comparable to a house of cards. The collapse of one bank sent more than a dozen others tumbling. Ultimately, depositors watched their accounts frozen and their savings evaporate through the fall of the lev from 65 per dollar in 1995 to as much as 3,000 per dollar in February of this year.

Mineral Bank and Economic Bank had the country's worst bad-loan portfolios before the sector's collapse at the end of 1995. Together, the two banks had accounted for 65 percent of National Bank refinancing by mid-1995.

Bulgaria's caretaker cabinet is in the midst of a campaign to clean up rampant corruption in official circles. Pro-Socialist bosses of the national energy company, the privatization agency, and numerous loss-making state firms have been sacked in recent weeks. The Socialist Party has complained that the moves are politically motivated. But President Petar Stoyanov says the sackings have not gone far enough.

Interim Interior Minister Bogomil Bonev said this week that his efforts are hampered by out-of-date legislation. The caretaker government is drafting new laws to be put before parliament after the April 19 elections.

Bonev says high-profile corruption crackdowns in Bulgaria are also having a psychological effect on small-time criminals who realize they are no longer untouchable.

Bonev said the former bosses of 250 state-owned, foreign-trade companies also are being targeted by investigators. Those state managers were familiar with the market environment and well placed to profit from it when Bulgaria began lifting export controls after 1989.

But Bonev said retrieving money siphoned out of Bulgaria since 1989 would not be an easy task, because of banking secrecy laws and differences in legislation with other countries.