At the end of its first week in office, Bulgaria's interim government is facing its first serious challenge with the expectation that the Corporate Commercial Bank, or Corpbank, won't repay a $150 million bond maturing this Friday.
If it doesn't, then Bulgaria's fourth-biggest lender will have defaulted on its bonds, further fueling the economic and political crisis in the European Union's poorest country.
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The crisis at the bank, which has been closed since it was hit by a weeklong bank run in June, has added to the woes of the Balkan country and even prompted a rebuke from the bloc's executive branch, the European Commission.
Corpbank has been under the control of the central bank since June after rumors of liquidity shortfalls and of shady deals by Corpbank's main owner prompted clients to withdraw more than a fifth of deposits. An audit was launched and the bank's day-to-day operations were halted.
Ivan Iskrov, the governor of the central bank, said key documents for loans worth $2.5 billion have most likely been destroyed, adding that most of the loans were linked to parties related to the bank's main shareholder, Tsvetan Vasilev, who is in Austria.
Last week, Moody's downgraded the bond to a notch above junk level after the bank missed an interest payment in July. It also noted that the preliminary results of the audit "indicate that Corpbank is likely to incur significant losses and, as a result, experience a larger capital shortfall than previously anticipated."
Bulgaria's Parliament, which was dissolved on Wednesday until a new one is elected in a snap poll on Oct. 5, has so far failed to adopt measures to rescue the bank, fueling the uncertainty over whether depositors and bondholders will be protected. Lawmakers have already rejected a government plan that included raising new sovereign debt to finance Corpbank's rescue.
The Socialist-led government of Prime Minister Plamen Oresharski resigned last month, the second government to quit in less than 18 months. Massive public discontent and a fragile parliamentary support hindered its efforts to impose needed reforms.
According to Lachezar Bogdanov from economic consultancy Industry Watch, the central bank will not withdraw Corpbank's license in the next two months, a move that would trigger the payment of deposits up to 100,000 euros, under European Union law.
The central bank said that under Bulgarian law the lender could remain closed for up to six months, thereby blocking nearly $4 billion in deposits of private persons and companies, which will be unable to pay salaries to thousands of employees.
The European Commission has urged Bulgaria to start repaying depositors in Corpbank as much as $2.5 billion that was insured by the state under European law.
In a letter to the Bulgarian authorities, the commission said it found the situation very worrying and cautioned that it may take steps to guarantee the application of EU law.
Oman's sovereign wealth fund, which holds a 30 percent stake in Corpbank, has so far been reluctant to provide cash to revive the troubled bank. The VTB Group, Russia's second-largest bank, which owns about 9 percent of Corpbank, has declined to provide liquidity.
Meanwhile, some 300 local depositors have joined a committee that has threatened to take legal action and sue the state if the bank does not reopen and they don't get access to their money.
"If the bank doesn't reopen on Sept. 21, we will launch legal actions," said Vezhdi Rashidov, a prominent Bulgarian sculptor. "The case with the bank is a criminal one, and the state has abandoned its duty to find out who stole our money."