CREDIT CRUNCH BLUES? NOT IN BULGARIA

In July a Bulgarian bank approved a 500,000 euro mortgage for an apartment in Sofia. To repay the loan, in the next 25 years the "lucky" borrower will pay monthly instalments of 3,500 euros. The media has been touting this record loan as an example that Bulgaria has successfully avoided the repercussions of the global credit crunch. But is this a fact or just wishful thinking?

Local experts claim that Bulgaria's property market is an oasis unscathed by the devastating effects of the credit crunch and the general economic downturn. In a way, this is true – after all, Bulgaria has never had a credit boom big enough to lead to any credit crunch. After a handful of financial institutions went bankrupt in the 1990s robbing thousands of people of their savings, Bulgarians became very cautious when dealing with banks. While at the beginning of the 21st Century in another corner of Eastern Europe – the Baltic states – people were buying properties by borrowing at 3.5 to 4 percent interest rates, Bulgarians did not even want to hear about bank loans. Before 2005, interest rates were too high to allow a malignant credit boom (17.90 percent in January 2000 and 10.57 percent in January 2005). Now, although it is widely believed that Eastern Europe has not suffered the consequences of the credit crunch, property prices are plummeting in the Baltic states. In Latvia, prices dropped by 20 percent in a single year. In Bulgaria, property prices for some segments are stable, others have been rising, and still others skyrocketing.

"Credit crunch" is a term used to describe a sudden reduction in the general availability of loans or a sudden increase in the cost of obtaining loans from banks. Financial analysts claim that both indicators – availability and stability of costs – show that investors and potential credit applicants in Bulgaria have nothing to worry about: In July 2008 alone, the number of issued mortgages jumped by eight percent on a year earlier, the average approved loan was 42,000 euros, a 45 percent annualised increase is expected in the number of mortgage loans in January 2007-2008 and bad debts account for only one percent of all mortgages. A mere nine percent of the applicants with primary approval changed their mind and declined a credit in 2008, compared with 18 percent in 2007. Analysts and credit brokers use these numbers as an argument against the global crunch's butterfly effect on Bulgarian banks and consequently on the property market.

What credit optimists forget is that Bulgarian banks have become much more cautious in the extension of loans to both locals and foreigners. At the end of 2007 the Bulgarian National Bank introduced a restrictive lending policy the effect of which has been that so far this year the number of applications that were denied a loan has reached one-third. As for credit costs, in 2006 it was expected that by 2009 interest rates would fall to about 5 to 5.5 percent or even lower. In fact, after a promising drop in the last five years, interest rates are going up again. Currently, the best offers are about 7.5 percent for euro-denominated loans and 7.85 for those in leva, but you should consider yourself lucky if you can get a loan at these terms. For some loans interest rates may reach up to 14 percent.

Borrowing is becoming expensive again, and this year interest rates have jumped by almost two percent, with some banks' having changed them three times already. On contract forms, the small print that states that "the bank has the right to change the contract conditions in accordance with its policy" has become many Bulgarian families' worst nightmare. The uncertainty about whether borrowers will be able to cover their monthly payments and for how long will inevitably prevent many potential applicants from purchasing a home or other type of property. So nobody will be surprised if the percentage of bad debts jumps substantially in the next few years.

The Bulgarian property market has suffered from a rather unexpected effect of the global credit crunch. This year the average Briton, who used to be the prime property buyer in Bulgaria, has been struggling with the consequences of the global economic downturn. In the first half of 2008 the number of houses repossessed because of overdue repayments has increased by 48 percent. Many Britons are under pressure from higher interest rates on their mortgages.

Increasing fuel and food prices as well as pending workforce cuts have done nothing to encourage previously enthusiastic Brits to invest abroad. Some are already selling their Bulgarian properties, while others have abandoned plans to invest in Bulgaria, not because "the bubble has burst" but because they have been forced to prioritise their spending.

The credit crunch has resulted in the loss also of another group of investors. The states which joined the EU in 2004 and which experienced property booms of their own had been bracing up to gamble on Bulgaria and Romania, the newest members. Brisk business from these countries alone could have successfully replaced the Britons and then some. Now, however, some of these states are struggling with the effects of the credit crunch themselves, while others have become cautious and are saving.

Even without the credit crunch, Bulgarian banks missed the chance to become the major factor they could have been had they chosen to encourage foreign investments. While the property boom was at its peak, they failed to meet the needs of small and medium investors. Around the world, foreign buyers are considered higher-risk clients, but Bulgarian banks failed to create a working mechanism to serve this group of applicants. So go ahead and believe the current hype that the effects of the credit crunch in Bulgaria are either secondary or limited. Just remember that while these global problems may not lead to local price drops, they may cause the market to stagnate and lose attractiveness.