(C) The Bulgarian Capital Market vs. The Global Financial Crisis – round 2008

For the past seven years the Bulgarian capital market has demonstrated weak if any correlation with the developed markets. During crisis, however, the markets correlate to one. In more simple terms this means that if crisis hits one market, it hits the other ones with the same magnitude. In the current liquidity trap, we tend to observe increasing coefficient of correlation of the Bulgarian market with the Global ones.

The liquidity crisis amid the high-risk mortgage loans in the US, has infected through structured products (MBS, CDO) the European markets. One should consider the heavy losses borne by some large European banks forced to write-down large US mortgage exposures.

Coming back to Bulgaria, we should mention that the strict central bank supervision and the relative isolation of the financial system balance sheets to foreign markets are both positive factors. On the other side the enormous credit expansion in the recent years, certainly including doubtful loans possesses threat to the low-risk banks’ bonds and loans portfolios. Moreover, one should not forget that most of the bank equity capital and liability financing comes from the majority shareholders of the Bulgarian banks which are some of the large European banks affected by the crisis. Any liquidity crunch out there would undoubtedly be a liquidity spasm in here.

I dare remind that besides the financial factors, there exist some basic macro factors which could also severely affect our capital market – the unemployment, the strategic exports and the foreign direct investments. The latest of those two are immediately dependent on the liquidity of the developed markets.