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Sofia’s world

2 July 2014 By Dominic Elliott

Bulgaria’s banking crisis has lessons for Scotland. The European Union’s poorest state per capita has won approval for a home-funded 3.3 billion levs ($2.3 billion) rescue after runs at its third- and fourth-largest lenders: First Investment Bank and Corporate Commercial Bank (CCB). That should give those envisaging a strife-free independent Scotland pause for thought.

Bulgaria’s financial instability seems more about political and social turmoil than economic fundamentals. The run on First Investment Bank on June 27, for example, was sparked by a flurry of inflammatory text messages sent by criminals bent on undermining the financial system, according to the Bulgarian central bank. Luckily for Sofia, which uses a currency board system that pegs the lev to the euro, it can afford to prop up the domestic banking system.

Bulgaria’s banking assets are 100 percent of GDP, public debt stood at only 19 percent of GDP last year, and the country has a current account surplus. Moreover, the state has 13.8 billion euros in foreign exchange reserves, almost half the value of the banking sector’s total deposits, according to Nomura. With 40 percent of accounts already in euros or other currencies, domestic depositors would have to convert a large portion of their outstanding levs to unsettle the peg.

A Bulgarian-style orgy of anonymous text messages and bank runs if Scots vote for independence on Sept. 18 looks unlikely. But if it happened, Scotland’s banking system could wind up looking more vulnerable than Bulgaria’s. Scottish banking assets would amount to 1,254 percent of GDP, according to the UK Treasury, and assuming its own share of UK liabilities would mean debt exceeding 70 percent of GDP.

If an independent Scotland opted for “sterlingisation” – using the pound, but without influence over monetary policy or money-printing capabilities – it could struggle to defend itself. Unlike similar small domiciles with outsized banking sectors like Hong Kong, Scots would have limited reserves, as well as a probable current account deficit.

That’s probably why wiser heads are advocating keeping Scotland in a currency union backed by the Bank of England. Anyone calling for something more adventurous should think of events in Sofia.

 

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