Bulgarian National Bank (BNB) became a shareholder in the European Central Bank (ECB) on January 1, the day of the country’s European Union accession, and Bulgaria is readying itself to make the first formal step towards adoption of the euro.

BNB governor Ivan Iskrov has become a member of the ECB general council. The responsibilities of this body include assisting in the preparations of a country to join the ERM 2, the two-year intra-EU exchange rate mechanism that is an overture to the adoption of the European single currency.

The other functions of the general council include supervision of statistical information about EU members, preparation of ECB annual reports, setting of rules for standardised accounting and reporting of operation of central banks and deciding on ECB capital increases.

The accession of Bulgaria and Romania to the EU led to a recalculation of the portions to be paid by member central banks that are shareholders of the ECB. BNB’s share if 0.8833 per cent of the capital.

Finance Minister Plamen Oresharski said that Bulgaria would apply to join the ERM 2 within the first three months of 2007. Currently, plans are for Bulgaria to adopt the euro in 2010. The country meets all criteria for euro adoption except its inflation rate, which is much higher than that allowed by the Maastricht criteria. Provisional figures show that inflation for 2006 will come in at 6.9 per cent.

January 1 2007 also saw the removal of BNB’s measures to slow credit growth in Bulgaria. The measures were imposed in 2004 because of concern about the rapidity of credit growth, which was seen as to blame for the country's worsening current account deficit. Credit growth in 2004 was about 50 per cent, in 2005 was 33 per cent, and is expected to turn out between 20 and 22 per cent for 2006.

On January 9, Bulgarian newspaper Dnevnik reported that, according to BNB figures, mortgage loans continued to set the fastest pace of growth on the local lending market, adding 100 million leva in the third quarter of 2006.

Local banks released 315.5 million leva in January to September 2006 compared to 216.1 million leva a year ago. The share of mortgage loans in total household loans was up from 32.1 per cent in June 2006 to 34.5 per cent in September 2006.

November data indicated that mortgage loans had risen to 3.3 billion leva, up 1.4 billion leva in the past 12 months. The number of non-performing mortgage loans was also on the rise, adding up to 200 million leva by mid-2006.

A BNB report said that substantial credit rate fluctuations in the immediate offing were unlikely. BNB officials saw neither upward pressure from ECB policies nor any downward pressure due to increased competition.

The rate hikes in the rest of Europe had no knock-on effect in Bulgaria because local banks were too intent on pursuing bigger market shares to increase the cost of borrowing. The trend emerged in 2006 and the BNB view is that intense domestic competition will keep interest rates more or less intact.

Mortgage rates on loans in leva fell from 9.78 per cent in 2005 to 8.52 per cent by the end of 2006 while the cost of consumer loans edged down to 9.87 per cent from 11 per cent in late 2005, according to BNB data.

Meanwhile, BNB Board of Governors has approved new ordinances governing, respectively, the merger of credit institutions and on the opening by Bulgarian banks of subsidiaries in EU member states.

A January 8 report by Bulgarian-language newspaper Banker said that theoretically, a bank does not permission from the supervisory bodies of the state in which it opens a subsidiary.

“There is, however, a subtle detail: anywhere in the EU the procedures demand from the credit institution that will be opening a branch to present a notification letter from the central bank of the country where its headquarters are. The BNB may refuse to furnish such a letter if according to its assessment a certain bank has unsatisfactory financial indicators,” Banker said.

This means that the central bank can effectively stop the foreign expansion of any Bulgarian credit institution. However, this concerns only banks owned by Bulgarian shareholders or non-EU members. Credit institutions that are part of big European bank groups do not need such permission.

The requirement for permission from BNB for shareholders intending to hold more than a 10 per cent stake in a bank in Bulgaria shall be maintained. Explicit permission from BNB is necessary for increasing the stake in a Bulgarian credit institution to 20, 25, 33, 50, 67, 75 and 100 per cent.

In addition to banks, BNB will be also licensing companies issuing electronic money. Their main line of activity will be to issue special cards, the so-called electronic purses, which clients feed with money.

Bulgarians, however, were still attached to money in cash and those who prefer the more modern way of non-cash payments have debit or credit cards, the newspaper said.

“At present the establishment of a company for electronic money seems rather a hypothetic possibility than a real perspective. If entrepreneurs wanting to embark on that business turn up, anyway, they will have to ensure two million leva of their own capital in order to get permission from the central bank,” Banker said.