New debt of BGN 200 million issued by the state - what will the money be used for?

The Ministry of Finance issued new three-year debt on the domestic capital market in the amount of BGN 200 million with an annual interest rate of 3%. This is happening for the first time in a year and a half.

The finance ministry reports the issuance as a success due to the long absence in the domestic market, the high liquidity of the financial system and the parameters and timing chosen for the issuance.

The funds raised will be used to refinance liabilities maturing this year, finance the budget deficit and secure the fiscal reserve.

"If we look at the Budget Law, passed by a wide majority in Parliament, we have a deficit of nearly BGN 6 billion. If we look at old debt issues, we have a maturing domestic issue of BGN 380 million, a BGN 3 billion Global Bond issue. Adding these two numbers, the state has a need of nearly 10 billion", calculates Lachezar Bogdanov, chief economist at the Institute for Market Economics.

"In order to fill the holes opened by Mr Assen Vassilev while he was finance minister, the entire budget was calculated to meet artificial criteria and the hope of these young guys was that if Bulgaria joined the eurozone on January 1, to unblock the foreign exchange reserve and they would have had another year or two to spend," says Viktor Papazov, a financier.

Increased tax collection, raising tax rates and tightening budget spending would limit the need for new government debt, analysts explain. In an election campaign, politicians may favour precisely more government spending to appeal to voters, leading to more debt issuance.

"There will inevitably be new debt if the budget is in deficit. You can't continually monitor, issue by issue, who issued and when, without starting the big conversation about how much deficit is reasonable to accept as normal," says Lachezar Bogdanov, chief economist at IME.

"New loans and debts will certainly have to be taken out because the holes have to be filled. At the end of last year, when we commented that Mr Vassilev's proposed budget was unrealistic, they were trying to persuade us that it was not. So it started being visible that it was," added Victor Papazov, a finance specialist.

Individuals can buy government bonds under the current rules, the finance ministry said, but the programme to facilitate trading by individuals is not ready yet.