When EU Membership's a Bust: Bulgarian Bank Run

A doo-run-run in Bulgaria.

The comparison that is usually made with regard to how bad Ukraine has had it due to choosing closer ties to Russia instead of the EU is Poland. However, this comparison is open to the criticism of cherry-picking examples: did all former Soviet satellites that joined the EU do as well as Poland? The answer, of course, is no. There are any number of other Eastern European countries that joined the EU and have had mixed fortunes.

Perhaps the bottom-performing one has been Bulgaria. In a number of ways it resembles Ukraine: high levels of graft and corruption and precious few signs of development. These were underscored by Bulgaria encountering that old-fashioned sign of financial crisis in the last week--the bank run--as the government was forced into a bailout:

Seven years after entering, Bulgaria has had three governments, remains the poorest of the bloc’s 28 nations and is repeatedly told by the EU to cut graft and corruption. In January, the EU said corruption “poses a significant challenge for the Bulgarian authorities.”

The general weaknesses of the system were highlighted last week when two banks suffered runs. One was brought on by an “organized attack” of “criminal actions,” according to the central bank. The other was sparked by what media reports described as a feud between the majority shareholder and a large depositor, who is also a member of parliament. The two men exchanged death threats, according to Bulgaria’s chief prosecutor, Sotir Tsatsarov.

Bulgaria’s worst financial crisis in 17 years forced the ruling Socialists to extend a 3.3 billion-lev ($2.3 billion) credit line to First Investment Bank AD and Corporate Commercial Bank AD, the country’s third- and fourth-largest lenders by assets. 

The parallels to Ukraine are obvious: just as the EU is now placing Ukraine on a seeming "fast-track" to membership, so did it do so with Bulgaria. This despite warning signs that governance in Bulgaria was not yet up to snuff with EU standards and would not be for quite some time:

The EU pushed Bulgaria’s candidacy even as it warned about the country’s organized-crime levels, bribery in public office and the failure to achieve convictions of those charged. Former Defense Minister Nikolai Tsonev, a member of then-Prime Minister’s Sergei Stanishev’s cabinet in 2008-2009, was arrested in 2010 and charged with bribery, abuse of office in procurement orders. Two years later he was acquitted on all charges.

Bulgaria ranked 77th of 175 countries, second-to-last in the EU after Greece, in 2013, according to Transparency International. Countries ranked higher and thus perceived as less corrupt: Ghana, Rwanda and Romania. In 2007 Bulgaria was 64th of 179, the second-worst in the bloc after Romania. “The EU is not only about economic support, it is a lot more: supremacy of the law, democratic values, security, prosperity -- all the reasons the EU was created for,” Bulgarian Deputy Prime Minister Zinaida Zlatanova said in a written response to questions. Zlatanova also is justice minister. 

This hasn't stopped Bulgarian officials from characterizing the bank runs as unrepresentative of Bulgaria's macroeconomic fundamentals, resorting to the time-tested excuse of unnamed shadowy forces working to undermine the country:

Bulgarians’ lack of faith in institutions sparked runs on two banks and triggered the worst financial crisis in 17 years, the nation’s president said. “Let me make this very clear: there is no banking crisis in my country, but there is a crisis of confidence,” Rosen Plevneliev said today in an interview with Bloomberg Television.

With low trust in institutions, rumors, attempts at destabilization and speculative attacks can “create a panic,” the president said in his office in the capital, Sofia. The government has extended a 3.3 billion-lev ($2.3 billion) credit line to First Investment Bank AD and Corporate Commercial Bank AD, the country’s third- and fourth-largest lenders by assets, after deposits were withdrawn. The crisis prompted Plevneliev to call early elections, a year after Prime Minister Plamen Oresharski came to power following anti-austerity protests.

The central bank blames an “organized attack” of “criminal actions” for the run on First Investment Bank. Corporate Commercial Bank lost deposits because of a dispute between a majority shareholder and a large depositor, Capital newspaper reported June 18, citing unidentified people. The yield on Bulgaria’s Eurobond due 2017 fell one basis point today to 1.636 percent, the lowest level since the central bank’s decision to bail out Corporate Commercial Bank, data compiled by Bloomberg show.

So there you are: EU membership is not a development panacea. Institutional reform is required as a precursor to making the best of EU membership instead of viewing membership as a guaranteed ticket to success. As the warning goes, "results may vary" for former Eastern bloc nations joining the EU.