Fiscal Reserves Down BGN 5 Billion During the Crisis. Issuing Debt is Next

The decision to issue new government debt of BGN 2 billion was largely expected, but caused considerable interest and many comments in the public. It is evident that the news itself for issuing new debt are never received well by the society and personification tends to appear in Bulgaria – up until now it used to be the “ Milen Velchev’s debt”.  Now it’s debated on how Djankov would issue (as if by himself) government bonds. Such an attitude is useful in the long run, since it generally makes the idea of ​​issuing new debt unpopular among politicians, but it should further evolve towards a general critique of the policies that inevitably lead to indebtedness.

Discussions about the crisis and the “anti-crisis” measures of this and the previous government are endless. All sort of things are being said and the truth is often concealed day-to-day debates. It is often argued that we faced the crisis as some kind of fundamentalists, with just our faith in the free market and complete denial of every government stimulus spending, which, as they say, brought upon us only problems and doesn’t correspond with what the developed world is doing. Such thesis, as strange as it is, is far from reality and all the data clearly shows it.

It has been three full fiscal years from the start of the crisis (2009-2011) and now we have a broader view of what actually happen with the fiscal policy in these years. Prior to the crisis, the country had sound public finances (budget surpluses) and over BGN 10 billion in reserves. Over the next three years the country accumulated more than BGN 5 billion in deficits and of course the fiscal reserves plunged to less than BGN 5 billion. Here is the simple story of the crisis – we addressed the problems by spending BGN 5 billion from our fiscal reserves. No taxes were reduced, it didn’t become easier to be an entrepreneur (from administrative and regulatory perspective), and nothing was done concerning labor market policies and legislation (from flexibility and rigidity perspective). The answers to the crisis were not structural reforms, but expenditure policies and shrinking reserves.

Overall, the positive is that this momentum was contained before the abyss – the revision of Budget 2010 is an example of just that. Not that the logic has been changed (spending against the crisis), we just avoided the fiscal crash. Even that wasn’t easy – it’s enough to remind of our call in January 2010 (“Do Not Raise the Deficit!“) as we publicly announced our resolution for sound fiscal policy, rather than populist spending.

And this brings us to today – the budget is still in deficit[1], the government is out of fiscal reserves[2] and payments on foreign debt[3] are coming in 2013. In this situation, even we say that debt should be issued. Simple as that – In January 2013 we should pay our bills (bog debt payment) and with our policies in the 3 years we put ourselves in a situation to be out of the reserves needed to do that. If we were reasonable during the last few years, there could have been BGN 7-8 billion in our fiscal reserve and we would not even have the debate of how to pay our creditors.

It is clear that the decision to issue new debt is now inevitable, but we should not forget that we have similar payment in January 2015 – over USD 1 billion. If by then we continue to accumulate deficits, taking on new debts will be news again – to finance both the deficits and that payment. In other words, after we entry in a spiral of deficits in 2009, in 2012 we can easily be entering the spiral of debt. The alternative is to be prudent in 2013 and 2014 and instead of deficit spending, start to restore what has been spent from the fiscal reserve. After all this is the basic idea of fiscal reserves – to set aside some money so we can use them later on to finance debt payments.


[1] The deficit for 2012 is estimated to be just over BGN 1 billion and is defined as “reasonable”, which doesn’t change the fact the we should finance it somehow. For 2013 deficit is foreseen as well.

[2] Resources available to the Treasury in the fiscal reserve are gone. This explains the trial of the government to make the Pension “Silver Fund” available for “investing” in government bonds. See comment on that here.

[3] External debt, however we try to personify it, is going to be repaid by all of us and especially the loyal taxpayers.

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