Bulgarian stress test for the Balkans

The Telegraph ^ | 7/7/2009 | Ambrose Evans-Pritchard

[bruinbirdman]

The Baltic trio of Latvia, Lithuania, and Estonia are lucky. At the end of the day, they can count on Swedish banks and the full might of the Swedish state to shield them from economic disaster.

The picture is messier in the Balkans, a region with eight times the population (55m) and no obvious Big Brother at hand, and messiest of all is Bulgaria where Sofia mayor Boiko Borissov inherits what he calls "the complete collapse of the country" after crushing the ruling socialists in elections over the weekend.

The former karate coach, who learned his politics as body-guard to Communist boss Todor Zhivkov and premier Simeon Saxe-Coburg-Gotha (ex child-king), has vowed to extirpate the local mafia and to stop the budget deficit "blowing up".

Like Latvia, Bulgaria has pegged its currency to the euro, with equally grim results. Monetary policy was too loose earlier this decade for the needs of a fast-growing catch-up economy.

The current account deficit reached 25pc of GDP in 2008, the highest of the 80 emerging markets around the world tracked by Fitch Ratings. Gross external debt reached 102pc. The property boom was out of control. If Latvia is any guide - fifteen months ahead of Bulgaria in the cycle - prices could fall 50pc.

"The macro-situation in Bulgaria is dire," said Lars Christensen, emerging markets chief at Danske Bank.

"Foreign investment has plummeted. The downturn in the economy accelerated in May and June. While the new government is an improvement, I would not rule out a drop in GDP of 15 to 20pc from peak to trough," he said.

"My concern is that this is going to spill over into other countries. If you look at the main lenders, they are Greece, Hungary (OTP bank), and Italy."

The Greek central bank has