10. Pitch or Ditch for the Bulgarian Credit Ratings?

Credit rating agencies apply the same set of core principals to analyze banks in Bulgaria, Germany or North America, but the relative importance between factors differs. This article contributes to an understanding of the dynamics in formation of a bank’s business franchise, and assessing its performance in one of the European emerging markets. A short review on the recent economic history elucidates constituents of the currency board and current fiscal regime. Bulgaria has still to achieve market maturity, so assignment of higher financial strength ratings is still to come. The unique Bulgarian combination of currency board and a very preferential tax regime, frequently explains the will of local politicians to deviate from the strategic European vision of cohesion, a sense of common purpose, shared identity and unity. Privatization and deregulation in Bulgaria occurred during the period of 1993–2003. Country had chosen centralized method for privatization, entirely focused on selling state-owned banks to foreign strategic partners. Prior privatization there was a demonstrated lack of prudent credit risk models and business-wise decisions. Gradually foreign strategic investors introduced culture of adhering to regulations and professionalism. However post 2004, banks exposed to local use and controls were involved in ensuring financial support to other business endeavors of their owners. The narrow local market and interrelated business environment encouraged all material bank owners to participate in varieties of other financial and non-financial businesses. Retail banking and investment banking overlapped, having no clear borderline between related and non-related businesses. This resulted in the construction of the local financial leaders, possible regulatory imperfections and political crises.