Tensions Within the Government Fuelled

Economic News

22 Jul 2010
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The surprise resignation - then de-resignation - of the country's finance minister last week brought to the surface once again continuing doubts over the future of Bulgaria's governing coalition. With the minister publicly airing allegations that he was being undermined by members of his own party - whom he claimed were refusing to support him over controversial budget cutting policies - the resignation crisis also cast doubts in the minds of many market makers. With the minister's return, international organisations warned there could be no deviation from the established economic programme.

Minister of Finance Milen Velchev, one of the more prominent members of Prime Minister Simeon Saxe -Coburg's cabinet, tendered his resignation on August 7 - only to withdraw it two weeks later on August 21, after holding a series of private consultations with the prime minister.

While the precise events surrounding this unexpected course of action remain the subject of controversy, in an interview released by the Bulgarian news agency (BTV) shortly following the announcement of his resignation, Velchev cited two specific grievances that had culminated in his decision to quit. Both highlighted what many observers have described as a growing split within Saxe-Coburg's National Simeon II Movement (MMSII) between Western-educated technocrats and the party's more traditional supporters.

Velchev's first complaint was what he described as the cabinet's continued lack of support for his conservative fiscal policy. This policy has, however, helped create an impressive budget deficit, which currently stands at less than 1%, as well as a fiscal reserve amounting to BGL4bn -BGL1.5bn - over the minimum threshold imposed by the International Monetary Fund (IMF). The second complaint was that his unremitting refusal to increase spending in cash-strapped, politically volatile areas such as health care, welfare, education and municipal finance had not been given the necessary support either.

Moreover, in the same interview, Velchev also alluded to escalating internal strife from within the cabinet in response to his controversial attempts to shut down a number of duty-free operations. Duty-free serves as one of the primary sources of internal smuggling within the Bulgarian economy. Velchev hinted that the recent revocation of an earlier decision to further extend the operating licenses of the three most prominent players within the duty-free sector by both the Finance Ministry and the Customs Agency had not helped bolster the minister's waning popularity within the party.

Speculation over the finance minister's resignation has also re-focused attention on allegations that Velchev himself may have a less than perfect record. One of the more popular theories to date claims that the minister of finance found further reason to resign in the light of the Ministry of the Interior's failure to vindicate him of his supposed links with the notorious mafia-linked businessman, Ivan "The Doctor" Todorov. This connection was allegedly captured in a photograph, leaked from police files, depicting both men together aboard a yacht - dubbing the entire affair the "Yacht Scandal" in the Bulgarian press.

International markets did not react well to initial news reports concerning the minister's quitting. Yet although prices for Bulgarian Eurobonds had dropped by 12 basis points following news of the resignation, prices immediately rebounded once Velchev reversed his decision. George Angelov of the Bulgarian Institute for Market Economics told OBG on August 20 that overall, the resignation affair had not had any direct influence on Bulgaria's current credit rating.

However it did give rise to a number of warnings. The World Bank's representative in Bulgaria, Oscar de Bruyn Kops told Bulgarian web service novite.com that, "We would be concerned if these developments would result in Bulgaria shifting away from its track record of a prudent fiscal policy and maintaining macro-stability, of providing foundations for economic growth which are the basis of improving the living standards of all Bulgarians."

Last week, sources close to the prime minister's office emphasized Saxe-Coburg's annoyance that Velchev had gone public over his resignation, which had become common knowledge thanks to a series of leaks, making the issue difficult to resolve quietly within the government. It is also widely alleged that the prime minister had already begun the process of interviewing possible replacement candidates before Velchev withdrew his resignation.

While internal divisions within the cabinet have been exacerbated by Velchev's stringent fiscal philosophy, after his resignation, a number of prominent ministers - including, Foreign Minister Solomon Passi, Transport and Communications Minister Nikolai Vassilev, Economy Minister Lydia Shuleva and Defence Minister Nikolai Svinaro - expressed their unmitigated support for their colleague.

These ministers not only hoped to convince the prime minister to reject the resignation, but also to turn the government's attention towards the more pressing issue: the impending privatisation of both Bulgartabac and the Bulgarian Telecommunications Company (BTC).

Georgy Petrov, an economics professor at the University of Bulgaria in Sofia, also voiced support for Minister Velchev's austerity measures, telling AFP on August 11 that, "No government can survive without raising real income, which is already very low in Bulgaria at 2% per year. But this is not possible while 40 to 50% of debt and guarantees are unpaid and blackmarketeering remains endemic."

Meanwhile, on the opposition benches, there is plenty of enthusiastic prediction that the hoopla surrounding the resignation and its immediate withdrawal could serve as the impetus for a debilitating political crisis that will further jeopardize the governing party's diminishing electoral prospects in October.

With nationwide municipal elections slated for then, a recent Gallup poll revealed that a meager 11.5% of Bulgarians currently support the ruling coalition partnership, comprised of the prime minister's National Simeon II Movement (NMSII) and the Movement for Rights and Freedoms. The two main opposition groups, the Socialist Party and the rightist United Democratic Forces, are on 20.6% and 10% of the overall vote respectively - though as polling is a relatively new phenomenon in Bulgaria, such figures should be approached with caution. Nonetheless, the resignation incident has highlighted NMSII's growing problems with winning the public's vote of confidence.

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