Over the past decade and a half, Bulgaria has become one of the first stops for Greek companies looking to branch out regionally. As a result, Greece now ranks as the third-largest source of foreign investment in Bulgaria and Greek lenders own a quarter of the assets in the Bulgarian banking system.

Given the sheer volume of Greek investment in Bulgaria, it is then little surprise that Greek-owned businesses were quick to issue reassurances that the rocky state of Greek public finances would have no impact on the operations of private companies in Bulgaria.

"These are public finance problems, which do not affect companies," Ioannis Polykandriotis, chairperson of the Hellenic Business Council in Bulgaria (HBCB) and executive director of fuel stations chain Eko Bulgaria, which is owned by Hellenic Petroleum, was quoted by Dnevnik daily as saying.

"The country’s credit rating has no bearing on Greek business, including in Bulgaria. Public finances in Greece are not in the best state, but the government has announced the measures that it plans to undertake and the targets are reachable," Spyridon Argyropoulos, HBCB general secretary and head of consultancy firm BB&T, said.

Greece’s budget deficit has attracted attention for all the wrong reasons since October, when the new socialist cabinet of George Papandreou said that the deficit would be 12.7 per cent of gross domestic product (GDP) in 2009, more than double the figure given by the previous government.

On December 8, Fitch Ratings said that it would cut Greece’s sovereign ratings for the second time in two months, to BBB+ with a negative outlook. It was the first time in a decade that any of the three major international credit ratings agencies rated Greece below A grade.

Standard&Poor’s and Moody’s Investors Service both put Greece on credit watch negative, which means that both agencies are examining the prospect of downgrading the country’s ratings.

Fitch also cut the ratings of four Greek banks with operations in Bulgaria to BBB+, saying that the banks held significant amounts of Greek government debt on their balance sheets, which in light of the sovereign downgrade could "contribute to a deterioration in the banks’ overall credit risk profiles".

The four banks are National Bank of Greece (NBG), Piraeus Bank and EFG Eurobank Ergasias, which own subsidiaries in Bulgaria, and Alpha Bank, which operates through a branch in Sofia.

A day later, Fitch cut the ratings of NBG subsidiary United Bulgarian Bank (UBB) and EFG Eurobank unit Postbank by one notch to BBB. "While the Greek banks’ propensity to support their international banking subsidiaries remains unchanged, their ability to do so has been reduced," the agency said.

Lower credit ratings mean that the rated banks would have to pay higher costs on new debt, but in this case the new ratings are still investment-grade and the lenders remained confident that the downgrade would not have a major impact.

"The probability of [difficulties re-financing] is very theoretical," Postbank CEO Anthony Hassiotis said, as quoted by Dnevnik. "The ratings downgrade does not affect us. What we care about is giving loans and offering good interest rates on deposits," he said.

UBB chief executive Stilian Vutev downplayed the importance of the ratings decision. "It is indeed unpleasant, but there are no repercussions for us. The bitter part is that the ratings downgrade was caused by reasons that we cannot influence," he said.

Euro mine
Greece’s situation is compounded by the fact that the previous cabinet apparently misled everyone on budget deficit figures, which already were well outside the limits that eurozone member states have to maintain at all times. In addition to the high budget deficit, Greek public debt is expected to reach 125 per cent of GDP in 2010, more than double the eurozone requirements.

Although those limits have been relaxed to allow governments to inject cash into their economies through stimulus packages, Greece now faces an even more arduous task of getting back within the eurozone-mandated parameters.

Papandreou’s proposal to decrease public spending includes a 10 per cent cut in social security, a 90 per cent tax on private bankers’ bonuses and abolition of bonuses at state-run banks, a capital gains tax, as well as unspecified tax reforms that would see the wealthy pay more. However, he shied away from the politically costly step of cutting public sector salaries, which prompted a further fall in Greek stocks and an increase in the cost of insuring debt against default.

European Economic and Monetary Affairs Commissioner Joaquin Almunia, who in an interview with Spanish newspaper El Pais published on December 13 said that Greece had to solve its problems on its own and could not count on a free pass from other eurozone countries, welcomed the announcement.

"The 2010 budget, which is being discussed in the Greek parliament, and Mr Papandreou’s statement, are steps in the right direction. We look forward to the spelling out in the stability programme, which is expected in the course of January, of concrete measures that will strengthen fiscal adjustment in 2010 and ensure a fast consolidation of public finances," Almunia said in a statement on December 15.

Eastern European members of the European Union have pointed out in the past that the Maastricht criteria for joining the eurozone have been applied in more liberal fashion to countries that were members of the bloc prior to the 2004 and 2007 eastward expansions, with Greece often mentioned as an example.

With Spain, Portugal and Italy all facing difficulties staying within the eurozone requirements, the prospects for Eastern European economies seeking to join the euro area look grimmer than ever.

Bulgaria plans to submit a formal application to join the exchange rate mechanism (ERM2), the eurozone’s "waiting room", in January. Although there are no specific requirements for joining ERM2, it requires political consensus that Bulgaria looks increasingly unlikely to achieve given the eurozone’s own problems.

The eurozone’s foundations are far from rocking just yet, but given the lack of a mechanism that would enforce observance of Maastricht criteria by countries already in the euro area, persuading the European Central Bank and eurozone finance ministers that Bulgaria would stick to the rules would be a long ask, given the country’s track record in meeting other EU requirements, most notably in fighting corruption and reforming its judiciary.