Bulgaria may have to pay a price for high growth

SOFIA – Bulgaria has not yet triggered a clause that could force it to pay hundreds of millions of dollars extra on its discount Brady bonds, but it might next year, its finance minister said. Bulgaria’s Brady bond contract stipulates the impoverished EU candidate must pay more – analysts say up to $288 million more – if its economy reaches 125 percent of 1993 levels. But due to vague wording in the agreement – the clause fails to mention which currency should be used to measure growth – Bulgaria has taken legal counsel to decide on a stance, Finance Minister Milen Velchev told Reuters in an interview on Wednesday. «The question was whether GDP should be calculated in dollars or in local currency, and the opinion of our legal counsel was that it should be local currency,» he said. «If it were in dollars, we would have likely crossed the threshold earlier this year. In lev terms, it will probably happen in 2005 or 2006.» According to Bear Stearns, if measured in dollar terms at current prices, Bulgaria breached the clause in 2001 and would have to pay $51 million. With Bulgarian levs at current prices, the trigger was in 1994 and the cost now is $288 million. But with GDP at constant lev prices – the method apparently preferred by Bulgaria – the threshold may be crossed next year. Brady bonds, named after former US Treasury Secretary Nicholas Brady, emerged in the 1980s as a debt-relief instrument for developing nations. Bulgaria issued three types of the bonds – including the discount series – worth $5.1 billion in 1994 in a wide-scale debt restructuring. Less than half of that is now outstanding. A fiscal reserve? Velchev, a former London investment banker, said in April that the Balkan country would call the bonds at par if there were indications it would be liable, but yesterday he declined to comment on whether a buyback was in the works. Bulgaria has around $680 million worth of the discount bonds outstanding. Its next chance to call them in for an early buyback is July 28, and analysts say it must announce its intentions 30 days in advance. The Bulgarian media is rife with speculation that the government will use its ever-growing fiscal reserve to call in the instruments, and the bonds, now trading at par, have been boosted by investors looking to cash in on a buyback. Under an IMF agreement, Bulgaria must keep deposits in the reserve to guarantee annual foreign debt payments of around $1 billion, but the reserve is now approaching over $2.5 billion. Velchev also said there were no immediate plans to prepay any of its roughly $1 billion in debt to the IMF or otherwise tap the reserve. «The reserve builds confidence for investors, and we do not have any plans to spend it,» he said. «We are certainly not looking to prepay all or even most of the IMF debt. We will watch that debt and have not ruled out prepaying a portion of it in the next couple of years.» He added that his ministry was also not planning any international debt issues at present. «We don’t have any plans to come to the market, which is natural, considering the level of the fiscal reserve,» he said.