Tuesday

27th Jun 2017

Feature

What happens when a currency collapses? Ask Bulgaria

  • The Communist lev was replaced in 1989, but its successor crashed seven years later (Photo: Ian)

Fifteen years ago, both Bulgaria and Romania went through rampant inflation linked to a financial crisis. Bucharest narrowly avoided the collapse, but Sofia was less fortunate and experienced a meltdown of the sort Greece is currently trying to prevent.

"Those were very bad times. Every day my salary was worth less and less, and there were fewer things I could buy with it," says Krassimira Komneva from the Sofia-based Most Foundation, an employment and education outfit.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

Back in 1996, Komneva was doing office work in a construction company. She recalls how the salary was late when the currency collapsed. "When I received it one month later, it was worth much less than expected. We all hurried to buy food, bread, oil. The prices were just crazy," she recalls.

According to the International Institute of Finance, inflation in Bulgaria hit 174.4 percent in 1996 and a record of 1,077.5 percent the next year. Its curency, the lev, went from 500 per US dollar in late 1996 to 2,200 per US dollar in February 1997.

Food shortages and a harsh winter drove people to despair, with mass rallies ultimately forcing out the post-Communist government largely blamed for the disastrous policies that led to the currency collapse.

"For the average people, it was just terrible. Nobody really understood what happened, the only thing we could see was that it all ended in disaster," says Komneva.

The central bank was subsequently stripped of its powers as the country entered in a "currency board" agreement with the International Monetary Fund (IMF) and other international lenders in July 1997, with the lev being pegged to the German D-Mark. Aimed at lowering inflation, boosting national reserves and restoring market confidence in the country, the currency board nevertheless seriously dented Bulgaria's sovereignty.

Romania only narrowly avoided a similar fate in the same period.

According to former President Emil Constantinescu, elected to power in November 1996 as the first non-Communist leader of the country, the country's national reserves when he took over had just 600 million US dollars, compared to current levels of €20 billion. At the same time, Romania had taken up some 5 billion US dollars in loans, which had to be paid back during his mandate.

"All of this led the IMF to suggest Romania should declare default on its debt. The second day after Parliament had confirmed my mandate, I received international envoys who told me this and gave it to me in writing," Constantinescu said in a 2006 interview with Gardianul newspaper.

Like Bulgaria, Romania was struggling with failing banks - both state and private-owned. Taxpayers' money was poured into the ailing state giants to help save them after they had lent billions to former regime protegees and their respective companies.

Meanwhile, most so-called private banks were in fact pyramidal schemes "designed to steal the money from regular citizens, set up by the mafia of the former Securitate (Communist secret police)" Constantinescu recalled.

Inflation peaked at 150 percent in 1997 and Romania had to seek an IMF loan of 500 million US dollars. It also had to privatise and profoundly restructure its state enterprises. But it avoided the embarrassment of having its central bank replaced with a currency board.

Not everyone was miserable during those years in Romania. To 41-year old trader Paul Marian, those were lucrative times in Bucharest. He remembers people flocking to his exchange office to get rid of the quickly depreciating lei and turn them into more stable D-Marks, US dollars or Swiss francs.

"I made good money in those years, the exchange office was working well. Everybody was just crazy about buying foreign currency," Marian recalls.

A cap on 500 US dollars was put in place for each citizen and later on, "when things got crazy", traders were banned from selling or buying foreign currency at more than five percent above or below the central bank exchange rate, he says.

That put an end to the big profits earned by exchange offices which had mushroomed in every Romanian town.

EU approves rescue of Italian banks

The European Commission gave the green light to a €17-billion plan by the Italian government to save Banca Popolare di Vicenza and Veneto Banca.

Row between EU ministers halts e-book tax rate

A bill to reduce VAT rates on e-books and e-publications has become the latest victim of a row between the Czech Republic and its partners over its own plan to collect VAT.

Focus

EU and China move to fill US void

At a summit in Brussels, EU and Chinese leaders will attempt to deepen ties on trade and climate as US president Trump plans to pull out of the Paris climate deal.

Italy reaches EU deal on failing bank

After months of negotiations, the European Commission and Italy agreed on the terms of rescue for Monte dei Paschi di Siena bank, including job cuts, salary caps and private sector involvement in the bailout.

Stakeholders' Highlights

  1. Malta EU 2017Conservation of Atlantic Tunas: International Measures Become EU Law
  2. European Healthy Lifestyle AllianceCan Statin Therapy Interfere With a Physically Active Lifestyle?
  3. EPSUOn Public Services Day, Stop Austerity! Workers Need a Pay Rise!
  4. EGBAOnline Gambling: The EU Court Rejects Closed Licensing Regimes In Member States
  5. World VisionFaces of Today, Leaders of Tomorrow: Join the Debate on Violence Against Girls - 29 June
  6. ECR GroupThe EU Must Better Protect Industry from Unfair Competition
  7. Malta EU 2017Better Protection for Workers From Cancer-Causing Substances
  8. EPSUAfter 9 Years of Austerity Europe's Public Sector Workers Deserve a Pay Rise!
  9. Dialogue PlatformGlobalised Religions and the Dialogue Imperative. Join the Debate!
  10. UNICEFEU Trust Fund Contribution to UNICEF's Syria Crisis Response Reaches Nearly €200 Million
  11. EUSEW17Bringing Buildings Into the Circular Economy. Discuss at EU Sustainable Energy Week
  12. European Healthy Lifestyle AllianceCan an Ideal Body Weight Lead to Premature Death?