The crisis could leave Bulgaria with higher debt and imbalances once the country enters the euro zone, while in Romania, the shock could be more brutal, although there is a good chance of rebound.
Bulgaria has a monetary council, which sets the exchange rate of the leva and the euro at 1.96. The costs of this system are low flexibility for cash inflows and the need for fiscal excesses that would supply foreign currency reserves. On the other hand, Bulgarians do not need to worry about the exchange rate, so the solvency of banks and prices are not affected by the crisis.
In Romania, the managed float exchange rate let the central bank set up reserves, counter the loose fiscal policy, but also allow for adjustment once the old exchange rate became unsustainable. The depreciation of the leu makes the adjustment of the current account too rapid, warns Citi, with Romania losing out to Bulgaria, except for the agreement it has with international lenders. The “credible” application of the foreign financing program with the International Monetary Fund and the European Union would strengthen Romania’s plan to join the euro zone.
Citi economists add that the disinflationist process seems to be more solid in Bulgaria than in Romania, and the fiscal policy applied by the neighboring country was more cautious than Romania’s procyclical one.
