Argentina is Down! Bulgaria to Follow? Assessing the Stability of the Bulgarian Currency Board

Abstract:     
In 2002, Argentina was hit by a very severe economic crisis. This crisis was a result of the unsustainability of its Currency Board. It has been six years since Bulgaria decided to introduce its Currency Board. Since then, Bulgaria has gone a long way in stabilizing its economy and progressing in the negotiations for its accession to the European Union. One of the basic prerequisites for Bulgaria's accession is economic stability. Therefore, it is more than ever necessary to evaluate the sustainability of the Bulgarian Currency board and identify any required policy changes that would guarantee Bulgaria's economic stability and create the conditions for its accession to the European Union. The paper is based on studies of the effect of the introduction of the Currency Board on the vulnerability of Bulgaria to international contagions, of the real effective exchange rate and through it to the external and internal balance and finally the debt sustainability and of the vulnerability of its banking system. Unlike Argentina, Bulgaria has an exit strategy; its accession to the European Union. The question is whether Bulgaria will face a persistent negative shock that will make the Currency Board unsustainable earlier than its accession. In order to guaranty its sustainability until accession to the EU, the study shows, that a number of problems have to be tackled. The single most important recommendation of course is that if for any reason Bulgaria faces a persistent negative shock before entering the EU, it is very important for Bulgarian policy makers not to hesitate to abandon the Currency Board.

Number of Pages in PDF File: 57

Keywords: Bulgaria, Currency Board, International Contagions, Real Effective Exchange Rate, External and Internal Balance, Debt Sustainability, Vulnerability of the Banking System

JEL Classification: E52, E58, H62, H72, H55, H15, E42

working papers series