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How not to be among the losers when the great impoverishment comes

Entering the Eurozone will be one of the most effective anti-crisis measures

According to the new Allianz Global Wealth Report, last year was the last good year for household financial wealth, and 2022 is a tipping point that ushers in a completely different era. Russia’s war in Ukraine has fueled inflation, an energy crisis and rising food prices, and tightening monetary policy will depress financial markets and raise interest rates. In real terms, households are expected to lose a tenth of their financial wealth, which would be the first significant “destruction” of financial wealth since the 2008 global financial crisis.

What does all this mean for Bulgaria?

We immediately see that those who have funds in a traditional deposit will gain from the whole situation, because they will start receiving interest on their savings. At the same time, those who bet on ultra-risky instruments – such as cryptocurrencies or overvalued stocks, bonds and real estate – will lose. Those who are excessively indebted will also have problems, which will be transferred to their creditors. We are returning to the normal foundations of finance, which is good, but the problem is that this return will be accompanied by the bursting of various financial bubbles, which will be painful for some investors and for entire countries.

To fight inflation,

major central banks are tightening monetary policy and raising interest rates.

However, the dollar and the euro are global currencies, meaning that tightening financial conditions in the US and the Eurozone lead to less available hard currency financial resources around the world. We see that even Britain is under pressure, even though it is among the largest economies in the world. The problem with small economies and small currencies is even greater.

These days, Hungary experienced a currency crisis and the central bank had to sharply raise short-term refinancing rates to as much as 25% (for comparison, in the Eurozone, rates are just over 1%). And despite these huge interest rates, the Hungarian forint has collapsed by nearly 40% against the dollar on a year-to-date basis.

Hungary’s problem is importing energy, as natural gas and electricity prices are very high. Hungary continues to import mainly Russian gas, but the price of Russian gas has increased dramatically and this is weighing on the economy and finances. Inflation in Hungary exceeded 20%, one of the highest levels in all of Europe.

Besides busting the myth of cheap Russian gas

the Hungarian example broke another myth – that it is good to be outside the Eurozone.

Of course, in good times it doesn’t matter if you’re in or out of the Eurozone – but in times of crisis, you can see how difficult it is for financial markets to be out of the Eurozone. In fact, it’s not just Hungary – currencies are depreciating and/or interest rates are high in all countries in the region that are not in the eurozone or eurozone waiting room. In Romania, long-term interest rates are over 9%, in Poland close to 8% – far higher than in the countries of the region that are in the Eurozone.

In the coming years, the desire of the countries of the region to enter the Eurozone will increase. Croatia will be first on January 1, 2023, and Bulgaria may be next because it is the most prepared – but it will take a lot of effort, a functioning parliament and government to make it happen. But it will be worth it. Joining the Eurozone will be one of the most effective anti-crisis measures.

In times of monetary tightening, rising interest rates and the risk of recession, the problem of defaulting debtors will inevitably increase. Therefore, the time is ripe for another radical measure – the introduction of personal bankruptcy. Bulgaria is the only European country without such a mechanism for clearing bad debts. The paradox is that we have a bankruptcy procedure for companies, but not for individuals. Of course, care must be taken not to abuse personal bankruptcy by unscrupulous debtors.

But personal bankruptcy is not just a way to eliminate the figure of the “eternal debtor” – it will also have a healthy effect on creditors, as

it will incentivize them to avoid indiscriminate lending without thinking about the risk.

The BNB recently increased banks’ capital buffers also in order to sober up creditors and stimulate them to prepare for more negative scenarios. In other countries, more direct methods for the prevention of excessive indebtedness are also applied – for example, for the ratio between the amount of credit indebtedness and the person’s income. The BNB was also empowered to introduce such limits, but has not yet used them.

The financial rearrangement will have other effects – for example, zombie companies that existed only because of easy credit will die, but more efficient and competitive companies will survive and grow.

This will shift the layers and open market niches, including for Bulgarian companies and for attracting new investments in our country. When financial investments such as stocks and bonds shrink, there will be more focus on real investments, on direct foreign investments – here Bulgaria must make serious efforts in order not to miss another “dealing of the cards”.

Regarding the energy crisis in the last year, Bulgaria managed to cope with the situation – including being among the first to introduce compensations for electricity prices at the expense of excess profits in the energy sector. Positive for Bulgaria is not only cheap electricity from local sources, but also much cheaper gas after the construction of the gas connection with Greece, which gives businesses in the country a competitive advantage. But we need to speedily build the liquefied gas terminal in Alexandroupolis with Greece in order to have direct access to gas producers all over the world and, accordingly, even more price competition. And of course, new investment in energy capacity should not be hindered – especially when large plants invest in their own solar installations to secure cheap electricity.

In short, the new financial times bring serious risks, but with a sufficiently skillful and bold economic policy, we can not only survive, but even profit from the financial rearrangement. Every crisis is also an opportunity, as we know from the Chinese.

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