Accessibility links

Breaking News

Bulgaria: Crisis Offers Lessons For Romanian Banks

Prague, 2 June 1999 (RFE/RL) -- A panic run at Romania's troubled Bankcoop last week by thousands of account holders is the latest in a series of events that highlight the fragility of the country's bank sector.

Since March, the Romanian National Bank has placed the large, state-owned BANCOREX under special supervision. The state's beleaguered Foreign Trade Bank has moved all its private accounts to another bank in an attempt to close branches. The small private Albina bank also has been declared insolvent, forcing the government to compensate account holders for part of their losses.

Plans to privatize most state banks have been delayed for years by political pressures and bad-debt problems. Analysts say the banks are being drained by non-performing loans - many of which are being issued under pressure from shadowy financial groups with ties to large state firms.

Romania's banking situation is reminiscent of conditions in Bulgaria in 1996 when the collapse of 14 banks brought that country to the brink of economic chaos.

Bernd Klett, an Eastern European analyst for Deutsche Bank Research, says the Bulgarian example offers lessons not just for Romania, but for Russia, the Baltic states, Slovakia, and even the Czech Republic.

"There is a shadow economy, of course, in all of these transition countries. In Bulgaria, part of the economy (has been) dominated by mafia. These are criminal circles who dominate sectors of the economy and also exert influence (on banks and their loan officers.) I think it might be something similar in Romania."

Klett said much of the pressure is rooted in the fact that large, loss-making state firms are part-owners of the very banks to which they apply for loans. He said another factor is corruption, which thrives where banking supervision is lax.

As a result, Klett said banks across Eastern and Central Europe continue to lend money to recipients who have either no ability or no intention of ever paying it back.

A 1997 U.S. Treasury-funded study on Romania's financial system also found that "political pressure on banks" has been a main factor behind bad loans. The European Bank for Reconstruction and Development (EBRD) says bad debts in Romania have continued to increase during the last five years -- from 19 percent of all bank loans in 1994 to more than 60 percent at the end of last year.

A recent European Commission report on Romania also is critical of the corporate governance of banks. The report, issued in November, complains the government has failed to root out corruption.

Bucharest's latest proposals on bank reform are based on recommendations by the World Bank and the International Monetary Fund. They are the same kind of recommendations that Sofia had paid lip service to before the crisis there forced the resignation of Socialist Prime Minister Zhan Videnov's government in early 1997 -- namely, to stop the hemorrhaging caused by bad loans, to strengthen supervision and to sell off state banks.

Most importantly, the World Bank says bank reforms must go hand-in-hand with speedier privatizations in all sectors of the economy. The aim is to break the links between the banks, corrupt state managers and the national budget.

The Bulgarian crisis shows how systemic corruption can ruin a nation's economy. Many Bulgarian banks were brought to insolvency in 1996 by what the World Bank calls "dubious relationships" with criminal business groups and state managers.

Corrupt managers and their allies drained the profitable activities of the state firms. Bank managers fueled these crony networks through risky loans that kept the loss-making state firms running in the short term. Meanwhile, politicians linked to these crony networks helped slow reforms by arguing that privatization and other reforms would cause workers to lose their jobs.

With no bankruptcy law in Bulgaria at the time, state firm losses ultimately had to be paid by the national budget. That added to the government's difficulties in servicing the foreign debts. A massive devaluation of the lev ensued when the problem became so widespread that central bank reserves were drained away.

The seeds of hyperinflation had been planted, and many Bulgarian banks became trapped in a vicious circle partly of their own making. Ultimately, the casualties of the Bulgarian crisis included Videnov's government, a score of state and private banks, and millions of Bulgarians whose frozen savings accounts evaporated in the free fall of the lev.

It took a new government and a strict IMF-backed currency board regime to bring relative economic stability to Bulgaria. Since then, Prime Minister Ivan Kostov has had the political support to push privatizations forward, start sacking corrupt state managers and break up some financial groups operating on the fringes of the law.

There are signs that Bucharest has learned a few lessons from the Bulgarian experience. The European Commission found progress in the strengthening of the authority and independence of Romania's National Bank. The legislative framework of the financial sector also has improved with the adoption of the Bank Insolvency Law in November 1997. That law gives courts the authority to close banks where liabilities exceed assets and where a bank has ceased payments for more than 30 days.

At the end of last year, a new body was set up to help Romanian state banks recover their bad debts. The EBRD says that body will help speed bank restructuring and privatizations.

Bank privatizations began at the end of last year with the sale of the Romanian Development Bank to France's Societe Generale. The French bank paid about $200 million for a 51 percent stake.

The government in Bucharest also has pledged that it will sell off part of Banc Post by the end of this year. Meanwhile, the large and troubled state-owned BANCOREX and Banca Agricola have been put into restructuring programs ahead of privatizations due to start sometime this year.