Bulgaria’s Bank Run Saga, Continued

Political Troubles in Bulgaria

We have previously written about “Bulgaria's Strange Bank Run”, but is appears the saga is not quite over yet, so we are providing an update on the  developments since then. Keep also the curious temporal synchronicity with the most recent developments in the South Stream saga in mind. We have wondered if there could be a connection between these events. We don't know obviously, and have as of yet not seen the possibility mentioned anywhere. It wouldn't surprise us though.

There have been extensive protests against the government of technocrat Plamen Oresharski in Sofia in 2013 that were originally triggered by the appointment of Bulgarian media mogul Delyan Peevski to the post of chief of the National Security Agency. The parliamentary debate on his nomination reportedly took a mere 15 minutes. The protests then forced the government to fire Peevsky from his post again a month later (officially, he withdrew voluntarily). However, the protests still continued thereafter.

Protests against the appointment of Peevsky as head of the State Agency of National Security began in Sofia in mid 2013. The demonstrations had been organized via Facebook. A number of academics declared themselves appalled at the anti-communist slant of the protests. For instance, the chairman of the Institute for Modern Politics, Borislav Tsekov, reportedly deplored the "primitive anti-communism" espoused by the protesters. However, there also were rumors that the usual suspect Western NGOs were behind the protests. The demonstrations curiously dwindled right after the government indicated it would greenlight the construction of a nuclear power plant by Westinghouse. This has subsequently indeed happened (see the preceding article on South Stream).

Concurrently with Peevsky's nomination, the laws governing the security agency were altered rather dramatically.  In the weeks leading up to Peevski's appointment, parliament had approved major changes to the legal framework governing the national security agency (DANS for short), which inter alia gave its head unprecedented powers.

Among the changes were:

1. DANS was no longer part of the interior ministry and instead put under direct control of the cabinet

2. the Anti-Organized Crime Directorate was no longer to be controlled by the interior ministry and instead placedunder the direct control of DANS

3. the President's right to nominate the head of the security agency was rescinded.

Bulgaria's political situation is quite complicated. One aspect of the political backdrop that one intuits by reading between the lines of press reports (especially in the context of the South Stream pipeline), is that there are political forces that have strong pro-European leanings and others that have a favorable view of extensive commercial relations with Russia (of course Bulgaria is a member of the EU, so its government must obey edicts from Brussels whether it wants to or not). However, even that is not as simple and straightforward as it may sound. This is not a split comparable to that we can observe in the Ukraine.

In Bulgaria's political landscape there is e.g. a political party that exclusively represents the country's fairly large Turkish minority (the “Movement for Rights and Freedoms”), which although small, is often needed for coalitions in order to achieve voting majorities in parliament. The party is strongly pro-EU. Then there is the “Coalition for Bulgaria”, an alliance of different socialist parties, as well as the conservative party, which is called "Citizens for European Development of Bulgaria" ('GERB' for short, after its Bulgarian acronym). Mr. Borisov, whom we have mentioned in the context of South Stream, is the leader of this party, which makes his apparent support for the pipeline rather curious. Normally it is the socialist alliance that is considered more Russia-friendly. Lastly, there is the nationalist “Attack” party (nomen est omen). In addition there exist numerous smaller parties that are currently not in parliament.

Many politicians have been accused of ties to organized crime in recent years, or have reportedly been blackmailed by organized crime. Corruption is a big problem, and it is no wonder that the citizenry has demonstrated against both the last government and the one that preceded it (which was led by GERB). Moreover, similar to many other former Eastern Bloc nations, Bulgaria has its share of “oligarchs” that have amassed big fortunes by skilfully exploiting the post-communist vacuum.

Adventures in Bankster-Land

We are mentioning this backdrop mainly because Mr. Peevsky subsequently played a major role in the bank runs that eventually brought down two Bulgarian banks. The bank runs started right after Peevsky withdrew his funds from CorpBank, which belongs to Tsvetan Vassilev, another oligarch. The media thereupon speculated that the whole bank run episode was the result of a spat between these two tycoons (as one of our readers from Bulgaria explained in an extensive comment to our original article, they once were friends but later became enemies who traded insults through the media).

In the meantime though, Bulgaria's central bank (BNB for short) has alleged that CorpBank was subject to a major fraud involving several high ranking bank employees. It also asserted that the bank's main shareholder Vassilev has absconded with most of the money.

Vassilev in turn let it be known from exile (he is reportedly hiding out in Vienna) that it was all a lie and an attempt to besmirch him for political and commercial reasons. While this sounds not very believable at first blush, there is at least one aspect to the affair that is rather odd.

According to a report at Forbes, it has been decided to wind the bank up and protect all depositors except Vassilev. The report also mentions the BNB's version of what actually transpired, and a crucial event of its story sounds quite strange, to say the least:

“Because of the extent of the fraud, BNB say that nationalizing CorpBank is not an option – it describes it as “a bottomless barrel”. CorpBank will therefore be wound up. Its banking license will be revoked, and all “good” assets and liabilities will be transferred to its Credit Agricole-Bulgaria subsidiary, which will be nationalized. All deposits except those associated with majority shareholder Tsvetan Vassilev will be guaranteed by the state.

According to Reuters, the Bulgarian Finance Ministry estimates that the cost of the deposit guarantee will raise the public deficit from 1.8% of GDP to 3%, putting it at the Maastricht treaty limit.

This will be seen as a considerable disappointment in Brussels, which in the recent European Semester report advised the Bulgarian government not to allow the deficit to rise any further. And it raises considerable questions about the capability of the BNB to supervise banks effectively. Only a month ago CorpBank was given a clean bill of health. Now it is bankrupt because of a major fraud.”

BNB’s statement makes a specific accusation of fraud against Vassilev in relation to the withdrawing of funds in advance of CorpBank’s failure.

Specifically – according to conservators – on June 19 this year, the day before the Corporate Commercial Bank was to be placed in special measures, a third party downloaded and delivered against receipt to the majority owner of Corporate Commercial Bank 205 887 223 BGN equivalent in cash, mostly Euro.

Reuters reports that in connection with this, the chair of CorpBank’s management board has been detained and an executive in the Treasury department has been charged with embezzlement.

Lawyers for that executive, Margarita Petrova, ridicule the idea of anyone withdrawing 206 million lev in cash and claim that the accusation against her is a smokescreen to hide what they describe as BNB’s “bungling” of the case. They have a point: a cash transaction of that size would by any standards be an extraordinary event, simply because of the physical amount of cash involved. Surely someone would have noticed truckloads of lev and Euros leaving a bank in Sofia the day before the bank failed?

Vassilev himself denies any wrongdoing and claims that there is a campaign to vilify him. It all seems very murky.”

(emphasis added)

It is indeed curious that such a large cash withdrawal happened without attracting notice or arousing any suspicion at the time it allegedly occurred. It all does appear quite “murky”, but what isn't in Bulgaria? For outside observers the situation in the country is often very difficult to assess. As our reader from Bulgaria rightly remarked, the events surrounding the bank runs were complex and many possible reasons for them were thinkable.

Mr. Vassilev has in the meantime been charged with embezzlement and an international warrant for his arrest has been issued:

“Bulgarian prosecutors said yesterday they have charged the main owner of troubled Corporate Commercial Bank (Corpbank), Tsvetan Vassilev, with embezzlement and an international warrant has been issued for his arrest. The bank was hit by a run on deposits in June that led to Bulgaria’s biggest banking crisis since the 1990s. Corpbank has since remained shut and angry customers are demanding access to their remaining deposits.

Vassilev was accused of asking two employees at the lender to withdraw 206mn levs ($140mn) from the bank between 2011-2014. Prosecutors said these funds were then transferred to another company owned by Vassilev, one of Bulgaria’s most prominent businessmen, who is currently living outside Bulgaria but whose exact whereabouts are unknown.

Vassilev, who was locked in a public feud with a rival at the time of the run, has repeatedly denied any wrongdoing and said the run was a plot hatched by his competitors. He has also previously accused elements of Bulgaria’s prosecution service of plotting against him. “Vassilev is indicted in absentia because he is out of Bulgaria, with residence unknown,” prosecutors said in a statement yesterday, adding they had charged him on July 28. “After his indictment, a European Arrest Warrant was issued for Vassilev … he was also put on the wanted list of Interpol.” Vassilev was not immediately available for comment. [you don't say, ed.]

On Monday, hundreds of angry Corpbank depositors protested in front of the central bank in Sofia, demanding access to their accounts.

(emphasis added)

Hang on – depositors were demanding access to their money this Monday? We seem to remember that the plan was to keep depositors whole. Their deposits were supposed to be held by the “good bank” that was created after the central bank took over CorpBank (a.k.a. “ the bottomless pit”).

Tsvetan Vassilev, ringing a bell in better times.

(Photo credit: © Anelia Nikolova)

However, as it turns out, things are once again a bit more complicated. The Austrian press reports that Bulgaria's deposit insurance fund doesn't have enough money to pay the bank's depositors.

“The Deposit Insurance Fund in Bulgaria can not pay the legally guaranteed customer deposits of ailing Corporate Commercial Bank (Corp Bank). This was stated by the president of the Central Bank, Ivan Iskrow, and interim Finance Minister Rumen Poroschanow in a response letter to the EU's Director General for the Internal Market, Jonathan Faull.

Faull had demanded early August that Bulgaria immediately begin with the payment of customer deposits up to 100,000 euros. This is however only possible after the National Bank revokes the license of the failed bank,  according to the response of the central bank governor and the minister of finance. The deposit insurance fund currently has only 1.05 billion euro available. However, the legally guaranteed customer deposits in Corp Bank alone amount to approximately 1.8 billion euro. "The insurance fund is thus short of 800 million euro," Iskrow and Poroschanow demonstrated by way of quick calculation.

Should the payment of deposits up to 100,000 euro already be initiated during the current financial audit of ailing Corp Bank, it would not be inconceivable that the bank could lose most of its customers which would make the recovery of the financial institution pointless. Auditing firm Deloitte and Ernst & Young has time until 20. October to complete the audit of the financial situation of Bulgaria's fourth largest bank."Depending on the audit result, shareholders of Corporation Bank will be invited to invest the capital necessary for the restoration of liquidity," write the central bank chief and the interim minister of finance.”

(emphasis added)

In other words, because CorpBank is a fractionally reserved bank, its existence would become “pointless” should its customers actually ask for their money. Note that this is money that should be “available on demand”. This is beside the curious fact that the government-run deposit insurance fund which exists to forestall such situations obviously cannot pay either.

If banks were forced by law to treat demand deposits in the same manner as every other warehouse holding fungible commodities on behalf of third parties – namely by keeping 100% of the tandundem of the deposited items available at all times – such a situation could simply not happen.

Banking is the only business on earth that is allowed to lend customer deposits  to third parties, while at the same time continuing to pretend that the funds are still available to the original depositors whenever they ask for them (in reality, only a small fraction of depositors can get their money back concurrently). As a result, two or more parties can become the “owners” of the same funds, which should be a legal impossibility (it is indeed considered a legal impossibility in all other warehousing operations). Fractional reserve banking therefore “works” only as long as its true nature is not discovered by distrustful depositors trying to get their money back.

Note here that if one wants to analyze this activity in terms of “maturity mismatches”, one must keep in mind that the maturity of a demand deposit is precisely zero. So even from this perspective, such funds cannot be legitimately lent out (for a more extensive discussion of the problems involved, we would point readers to our series of articles on fractional reserve banking, which can be found here: Part 1, Part 2, and Part 3).

Conclusion:

Depositors of CorpBank – at least those who had fewer than 100,000 euro deposited with it – are actually lucky that Bulgaria is an EU member, as that fact will ultimately force the government to pay them. However, it should be noted that this is nothing to cheer about, as it means that tax payers who had absolutely nothing to do with the events will be forced to pick up the tab. The basic problem is that the privilege of fractional reserve banking is a violation of property rights to begin with, which is now exacerbated further as tax payers are forced to jump into the breach. Note that given the fact that credit expansion ex nihilo is also an indirect violation of the property rights of unrelated third parties. This is so because it leads to a redistribution of wealth from later to earlier receivers of newly created money and furthermore causes the boom-bust cycle, which as a rule is highly detrimental for large parts of society.

Addendum: Bulgaria's Stock Market

Since our first article on the bank run, the stock market in Sofia has built a symmetrical triangle that is presumably soon going to resolve one way or the other. Per experience, the probability of this being a continuation formation is quite high.

A triangle has formed on the daily chart of the SOFIX, via Teletrader