The anti-market reforms of the Oresharski cabinet – part two

In the first part of the series on the anti-market actions of the cabinet, formed in the last parliament by the three parties (BSP, DPS and Ataka), we examined some of their harmful decisions and actions, including the increase in debt, measures against ERPs, the increase and maintenance of risk in the business environment, populist actions, such as increasing the minimum wage and maternity benefits. Here we will focus on some of the more recent anti-market "reforms" of the "Oresharski" cabinet. The existence of such is clear evidence that despite the unabated protests literally from its first days, the government's energy for populist and restrictive actions on the market economy and individual freedom has far from been exhausted throughout its mandate.

In the spring of 2014, the parliamentary majority adopted amendments to the Consumer Credit Act, “regulating” the activities of credit institutions that provide so-called “quick loans”. The most important amendment, among others [1], is the regulation of the ceiling on the annual percentage rate of charge – the fee that in practice makes quick loans more expensive. [2] The text of the Consumer Credit Act states: “The annual percentage rate of charge cannot be higher than five times the amount of the legal interest on overdue debts in levs and in foreign currency, determined by a decree of the Council of Ministers of the Republic of Bulgaria.” This was a measure aimed at protecting ordinary consumers from “fraudulent” credit institutions.

But there are very logical reasons for the high fees on fast loans. Credit institutions that provide fast loans often serve people without a credit record but with a high time preference (i.e. those who potentially carry a higher risk, but who prefer or need current goods much more than future goods), do not have the capital resources, and often the ability to conduct a detailed analysis of their potential clients, which further increases the risk. In other words, the higher fees that these institutions charge are de facto a premium for the high-risk environment in which they operate.

The new restrictions will in no way make the environment more transparent; on the contrary, they will make it more difficult for companies that provide quick loans, and, respectively, their clients who want to get money easily today, for whatever reason. That is, the cap on the annual percentage rate of charge will limit the number of people who can get quick loans, and perhaps also reduce competition in the sector - companies that will not be able to operate at the new lower risk premium will disappear. As always, when the activities of a company or a sector are regulated, the victims, in addition to the companies in the sector, will be their consumers.

The government's actions, authorized by the EC, regarding the banking crisis that has broken out, albeit seemingly short-lived, can also be defined as absolutely anti-market. In just one day, Brussels allowed the banking system to be "supported" with 3.3 billion leva, which should increase liquidity (by the time this article was completed, the specific mechanism by which this will happen has not been clarified). Already on Sunday (June 29), the Ministry of Finance held an auction for government securities worth 1.5 billion leva. Regarding these actions, we should focus on two points: 1) if the state needs to save specific financial institutions, then why is absolutely every company from every industry not being saved?; 2) contrary to popular belief, the instability of the banks is not a consequence of published rumors, but of the state's institutionalization of the fractional reserve banking system. [3]

Let’s look at them. The bankruptcy process is inherent in a market economy and even useful – it shows market participants what not to do. Since bankruptcies in no other sector are deterred by the government and companies are not “rehabilitated” through public debt, this, in itself, perhaps clearly shows where the genesis of the problem lies: in the state-sanctioned fractional reserve banking system, which is structurally doomed to failure. In this case, it is quite normal for the banking system and any bank in it to be threatened by a rumor, but if the traditional principles of full-reserve banking were followed, this would be impossible. [4]

As it turns out every year at this time, state overregulation in the energy sector is once again proving to be a problem for business. This is especially true for industrial consumers of high-voltage electricity, which is purchased in quotas and whose price is determined by the State Energy and Water Regulatory Commission (SEWR). Already at the end of June, four professional organizations threatened to boycott the planned price increase of 2.29 leva per megawatt-hour. Ultimately, such price manipulations lead to uncertainty in the business environment, as well as to potential job losses due to lower competitiveness (if they are adopted). Moreover, NEK's own reports on the company's financial results over the past four years show (in addition to all the other empirical, historical, logical and economic examples we have) that the state is an extremely bad regulator and that the production, distribution and supply of electricity must be completely liberalized.

The data published by the State Electricity Regulatory Commission (SEWR) show that deficits worth almost 3 billion leva have been accumulated, and the payment of 1.493 billion leva will fall directly on the shoulders of end users through their electricity bills over the next few years, which also caused the increase in electricity prices for households from 01.07.2014 (despite the populist actions described in the first article to "lower" the price from January). Of course, the accumulation of NEK's deficit is not only a consequence of the activities of the "Oresharski" cabinet, but we cannot help but point out that it is in no way working to solve the problem, but simply shifting the responsibility for the dysfunctional system of central planning in the energy sector to those least responsible for it, namely - the consumers.

In the next article, we will look at some missed pro-market reforms in various sectors, as well as more examples of harmful actions by the government.

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