EKIP– Expert Club for Economics and Politics A Different Opinion
If you follow the local media, you have probably already heard about another scandalous loan granted by the Bulgarian Development Bank. This time it is not about one of the large businesses associated with Delyan Peevski, but about another businessman with a dubious public reputation - Rumen Gaitanski, nicknamed "Vulka", known for his closeness to Ahmed Dogan. The BDB has granted a 150 million leva loan to a company associated with Gaitanski, which has neither properties nor registered activity. This loan is for the acquisition of another related company with a turnover of only 13.6 million leva. Through what mental gymnastics such a large loan can be justified for the acquisition of a company with such a small turnover is a mystery. But that is not all.
This loan is equivalent to 10% of BDB's credit portfolio, which is a very high level of risk exposure to just one business and further exacerbates suspicions of the state bank being drained by politically connected individuals. Mr. Gaitanski himself is an old player in the garbage collection business (recall the Wolf company in Sofia), but he has not always enjoyed the favor of the authorities. During his first term as mayor of Sofia, Boyko Borisov publicly boasted that he had managed to remove Gaitanski from the garbage business in Sofia. Does the current prime minister still take pride in this achievement today?
The details of how Gaitansky’s business became BDB’s most serious investment are particularly interesting, and you can read more about them in Capital. In this article, however, I would like to focus on the elephant in the room – BDB itself and the way it is used. Namely – to provide loans backed by a state guarantee, not to small and medium-sized businesses (as it supposedly intended), but to very large businessmen with dubious reputations and deep political connections.
Good intentions meet economic reality
BDB was established 20 years ago in 1999 as an "encouragement" bank. The idea is to support small and medium-sized businesses in Bulgaria through state financing through the bank (owned by the Republic of Bulgaria). By design, in order to minimize market distortions that can arise from such state financing, the bank should only lend in sectors that are "underfunded" because private banks see too much risk.
The problem is that even with such good intentions, such a bank is always doomed to become an instrument for draining public resources, i.e. taxpayers' money. If private banks are unwilling to lend to a business, there is usually a good reason for this. Even if it is not used for political draining, if the state-owned bank finances excessively risky businesses that are unprofitable in the long run (and therefore no one lends to them), this will always result in losses for the Bulgarian taxpayer.
Moreover, it hinders the functioning of market competition, which eliminates unsustainable businesses so that sustainable ones can emerge in their place. If the state finances excessively risky and loss-making businesses, it delays their elimination from the market and their replacement with more competitive and profitable companies. Thus, scarce economic resources are poured into enterprises that cannot absorb them effectively, and accordingly, consumers will be offered a lower-quality product. Is this the purpose of state financing?
The state cannot decide which business deserves to continue to exist and which does not. This can only be decided by the users of the respective businesses through the market process. If there are enough users for a given business who believe that it brings added value, and is therefore profitable, then banks will lend to it. Because there is a profit. State intervention in this market process is completely unnecessary.
Political cronyism leads to Hell
But the shortcomings of state financing of private projects described above are not even the biggest problem in the case of institutions like BDB. The biggest problem with such state-owned banks is that there is a huge financial incentive to abuse them and turn them into instruments for draining public resources in favor of politically connected businesses. This is exactly what is happening in Bulgaria. This article by Kapital describes in detail the largest credit exposures of BDB. Note that they are all to businesses that are associated with businessmen with solid political connections and a dubious public reputation.
There is no other way. The incentive for abuse is too great. In politics, if there is an available financial resource that can be drained in some way, it will always happen. But the bad thing is that the longer we allow it to happen, the greater the risk for us, the taxpayers. Financing politically connected businesses inevitably leads to concentration. The loan to the company associated with Gaitansky is a clear example – 10% of a bank’s portfolio is a very large exposure. If a private sector bank makes a similar loan and it stops being serviced at some point, the bank’s profits will collapse, liquidity will evaporate and it will find itself in an extremely risky financial situation. At risk of bankruptcy.
Remember what happened to CorpBank. It was extremely dependent on the money of a very small number of businesses. When its relations with these businesses were severed, CorpBank very quickly found itself without liquidity and the ability to pay its debts and eventually went bankrupt. If something similar happens to BDB, guess who will pay the bill? These will not be losses for the political class and the bank's management, who allow the bank to be drained, nor for the "businessmen" who drain it. These will be losses for the Bulgarian taxpayer.
