An operation was carried out for the first time in 1991 to settle the indebtedness of the state run companies to the banks. The Council of Ministers passed a Regulation #136 on July the 12th 1991. A special Committee was appointed Deputy Prime Minister chaired and the Ministries were obliged to supply information about the non-performing credits obligations of the state run companies prior to December the 31st, 1990.

The Committee is to come up with a list of companies to be liquidated the revenues servicing the credits and interests owed, with a new company debt performing plan guaranteed by the government, and with the liabilities that can be paid as government debt as well. In the meanwhile the Great National Assembly approves the amended State Budget Act for year 1991. Its Clause 7 of the Transitional and Concluding Regulations (Official Gazette issue 62, 1991) decrees the Council of Ministers to distribute a quota of 5,000 mln leva state guarantees for the near deadweight credits, the settlement of those not performing included here. The Council of Ministers is also to provide for the procedures of administering this resolution.

The Council of Ministers is considered to have fulfilled the requirements of the National Assembly obliging the existent Committee at the Council of Ministers by reason of Regulation #136 to specify the order, forms and criteria to be followed by the Ministries when compiling the information needed.

They did not provide for procedure for company liquidation, or specify conditions for that taking for given that Decree #56 concerning industrial activities contains regulations that cannot be violated. Thus all the activities practically lead up to the selection among the many candidates of a limited number of enterprises whose liabilities are to be settled within the 5 billion leva quota. Later the quota was reduced to 4 billion leva as asked by the Minister of Finance, also member of the government committee.

The experts in the economic ministries took two months to process huge amounts of information. It was agreed to offer settlement of credits only to enterprises with future and secured markets. The originally prepared lists, the result of long debates, used to meet those requirements. Later on, however, under the syndicate pressure, considerable amounts from the total quota were vainly allocated to go to mining enterprises which were in 1992 meant to be closed.

The Council of Ministers Resolution #319 of September the 18th, 1991 approved the distribution of the total of 4 billion leva across ministries. Within the quotas given the ministries had to select the enterprises whose credits were to be written off. The quotas were allocated basically on the accepted principles to assist enterprises with prospects and partially betrayed only under the pressure of striking committees mainly in a branch of industry. The following is a reference demonstrating this allocation:

1. Ministry of industry, commerce and services 2081.1 mln

2. Ministry of agriculture and food production 679.2 mln

3. Ministry of construction, architecture and welfare 319.4 mln

4. Ministry of transport 604.0 mln

5. Committee for tourism 270.0 mln

6. Other organizations 46.3 mln

The 4 billion debt write-off operation actually took place in 1992 as the procedure for issuing bonds to secure the cleared debts of the enterprises was set forth in Council of Ministers Regulation #224 of December the 29th, 1991.

A state security loan was declared of unregistered bearer bonds (payable to bearer) in coupons of 10,000,000; 1,000,000 and 100,000 leva, bearing interest equal to the base interest rate for the respective period plus a point. Every year on the 1st of January and the 1st of July the interest is to be paid from the state budget to the banks holders of bonds. The performing of this security loan starts off January 1997 to go on for a 15-year period. In accordance with Article 3 of the quoted Regulation the commercial banks recipients of bonds substitutes for written off liabilities of enterprises have the right to sell the bonds by their market price and also use them as pledges and guarantees.

The enterprises were decreed to book the written off debts as capital increase.

The bonds issued in this first dodge credit operation are still part of the redeemable assets of the banks as bearers of good interest and securely performing ones. Many financial houses and banks take interest in them and they are traded and pledged by the banks holders of bonds. So this first bad credit operation benefited the banks in the first place, and the 1992 budget was burdened in its expenditure parts by a certain amount of interests.

The analyzed effects on the enterprises having enjoyed this operation turn out to be appreciable in very few cases of good performance after the clearing of obligations. Appendix 1 enlists the enterprises under the Ministry of Industry. Of the total of 2,081.1 mln leva 661 mln, that is about 30 per cent went to mining enterprises. Many of those as early as in 1992 were on the closing lists. The Ministry of Agriculture's performance was similar in results. The tourist and construction enterprises did better. (see Appendices 2, 3 and 4).

Of the total quota of the Ministry of transport (604 mln leva) 537,4 mln were transferred to the Bulgarian national railway. The BNR is known to be in poor financial condition to date owing new deadweight credits and again claiming its liabilities to be transferred to the state budget.

The aforesaid proves that the 1991 resolution for 4 billion leva government funding of enterprises obligations solved partially only the problem of cleaning the bank portfolios. In real terms it has not had significant effects.

It deserves to be mentioned that the operation was being carried out in the course of a rather long period (a year or so) which contributed to the above overall picture. The outcome might have been very different had the operation been enacted in different ways and in early 1991.

In 1992 a second writing off of enterprises' obligations took place as decreed in accordance with the State Budget Act for year 1992, clauses 3, 4, 5 and 6 of Transitional and Concluding Regulations.

The 1992 State Budget Act is passed in April 1992, but the Council of Ministers does not accomplish the resolution to set forth the procedure of servicing non-performing credits by government funds amounting to 5 billion leva until the end of 1992. Thus the mistake already made in 1991 recurs again - the solution of the problem is delayed and again moves slowly to pamper selected enterprises. A different approach, however, was demonstrated to be attemptedly adopted. On the 24th of November 1992 the Council of Ministers passes a regulation appointing a committee to arrange the procedures of writing off non-performing credits. A program is set forth, too, as to the activities on the restructuring of the non-performing credits. As different from 1991 the resolution features the banks' participation to partially perform the obligations against their own reserves. The liabilities are being serviced on the so called "State crediting" fund. Strict requirements are placed on the enterprises whose debts are being written off, such as submitting financial and recuperating programs. The regulation also obliges the enterprises with loans restructured as government debts in case of privatization to first service the liabilities written off. Later on in 1993 the new government interpreted this text as contradicting the Privatization Act, where the procedure is provided of allocating the profits from the sales.

In January 1993 a sum of 5 billion leva was distributed among ministries. This was approved by the new government in its Resolution #14 of the 18th of January 1993. The allocations go as follows:

1. Ministry of industry 3,454.4 mln leva

2. Ministry of agriculture 760.0 mln leva

3. Ministry of territorial development and

construction 665.6 mln leva

4. Ministry of commerce 55.5 mln leva

5. Ministry of defense 65.0 mln leva

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5,000.0 leva

The quotas allocated to enterprises are provided in Appendix 6.

The regulations of Ordinance 234 of November, the 24th,1992 (Official Gazette issue 98, 1992) "concerning the restructuring into government liabilities of the non-performing credits of one-man business companies with state property, state owned companies to clear the credit portfolios of the commercial banks with more than 50 per cent state participation" were not obeyed in the part about writing off credits against banks' reserves. The Bulgarian National Bank was the only one to meet the program requirement to service out of its own deposits part of the so called "State Crediting" fund loans. Every one of the enlisted in Appendix 6 business companies and enterprises had signed contracts with the Ministry of finance as regards the conditions they were obliged to obey to in connection with the restructuring of their liabilities into state debt. The branch ministries submitted analyses for the financial recuperation of the enterprises whose loans had been written off.

The above stated procedures (contracts with the Ministry of finance, financial recuperation programs) were under way all through the year 1993 and 5 billion leva loans were actually restructured into state debt in an operation enacted after the Council of Ministers passed Ordinance #186 of 24th of September 1993, which declared the state security bond loan to cover the non-performing liabilities of the one-man business companies with state property to the banks.

As different from the 1991 operation declared in Ordinance #224 of 29th of December 1991 of state security loan bearing interest equal to the base interest rate of the central bank for the period in question plus a point, the second security loan introduced reduced interest rates. During the first and the second years the interest is equal to 1/3 of the base interest rate; during the third and the fourth years - to 1/2 of the base interest rate; during the fifth and the sixth years - to 2/3 of the base interest rate and from years seven to twenty five included - to the base interest rate of BNB.

The interest as has been decreed is to be paid with redemption dates July the 1st and January the 1st every year.

The securities of this second loan are due to be performed within 20 years period, starting July the 1st, 1998 through equal installments paid annually. The first security loan (Ordinance #224 of December the 29th, 1991) differs in this respect, too, as its amortization period is 15 years through equal in amounts drawings of lots with the first drawing due on the 1st of December 1996. The resultant allocations of the two security bond loans of 1991 and 1992 according to the quotas distributed by the 1991 and 1992 State Budget Acts go to the ministries as follows:

1. Ministry of industry 5,335.5 mln leva

2. Ministry of agriculture 1,439.2 mln leva

3. Ministry of territorial development and

construction 985.0 mln leva

4. Ministry of commerce 55.0 mln leva

5. Committee for tourism 270.0 mln leva

6. Other organizations 46.3 mln leva

7. Ministry of transport 604.0 mln leva

8. Ministry of defense 65.0 mln leva

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9,000.0 mln leva

The second operation of clearing bad credits again has had negligent impact in real terms. This state of affairs was brought about by the already featured wrong approach, late start, long taking execution of the activities of this operation. This all, however, turns out of secondary importance. More substantially as significant remains first the pointed above wrong direction of the economic reform which did not realistically assess the condition of the financial crediting in the country and second - with the two operations (of 1991 and 1992) those responsible were eager with varying degrees of emphasis to support certain selected enterprises. The question of clearing bank portfolios and the overall financial situation were thought less important.

Here we will open a parenthesis to explore the following. In early 1991 certain elements were incorporated of business relations between banks and enterprises without the necessary conditions present for those - the enterprises dipped into mutual indebtedness. The professionals from the World Bank were earlier to notice all that than the experts at the ministries and banks. The World bank forced the government into passing a special program for tightening the financial discipline of the state enterprises, reducing the indebtedness to suppliers and the overdue payments ( Resolution 1992). It sets forth by the end of 1992 the industrial ministers to supply information as regards the financial-economic condition and prospects for development of the companies whose activities are advisable to be terminated and together with the banks to start proceedings of declaring insolvency. Simultaneously it was expected the then existent Committee for the Normative Acts and the Ministry of jurisdiction to develop an insolvency law. These and other intentions along similar lines as provided for in a program were appreciated by the visiting at the same time mission of the World Bank, who relying on this program granted the expected SAL tranche of 100 million dollars. Unfortunately this program directly relating to the bad credits problem, was not fulfilled in its best part.

It deserves to be noted that not all of the former socialist countries started their economic reforms with considerable foreign debts, but in every one of them the so called socialist enterprises were deep into obligations to banks, that had been rescheduled a number of times and had no prospects of servicing. It was only natural starting the transition from totalitarian to market economy the economic reform to take this microeconomic precondition into account. In countries like Poland and Hungary the problem turned out to be comparatively easier since they enjoyed as early as in the eighties flashes of economic thinking in the financial management. Czechoslovakia undertook measures at the beginning of year 1991 to relieve the commercial banks of the so called bad credits and transfer them to a state bank with the Ministry of finance. This has been appreciated as one of the felicitous measures of the then minister of finance - Klaus. I believe this action is one of the major factors contributing to the financial stability of this country during the whole transition period.

It is a pity our country underestimated this issue and did not pay enough attention to the fact that prior to the 31st of December 1990 had been granted 15.7 billion leva in short-term loans and 21.5 billion leva in long-term ones, mostly entirely inelastic, that is unsusceptible to the impact of the normal in other countries monetary-credit instruments. This was one of the reasons why the interest policy of years 1991 and 1992 favoured the inflation rather than curbing it.

These findings found more and more supporters and in 1993 the opinion took over that a radical approach should be adopted to the effect that the whole of the non-servicing credits granted before the end of 1990 be restructured as state obligations. The 1993 State Budget Act approved by the National Assembly in April 1993 authorised the Council of Ministers to come up by June the 30th, 1993 with a draft of a mechanism for granting state guarantees for the unpaid credits owed by state-owned firms and companies prior to end of 1990, which is to remain efficient in the contingencies of bankruptcy, privatization or restructuring, the debtors' closing included here, as well as with the order of writing off the unpaid credits.

As evident the good old intention of 1992 is there again the state to interfere only with selected enterprises with bending closures or privatization. The draft submitted by the Council of Ministers (again rather late on the 13th of September, not by 30th of June) approved by Resolution #336 of the 13th of September 1993 provides only for the procedure of restructuring the unpaid credits owed prior to December 31st, 1990. The Council of Ministers motivates this specifying that what is meant is a one-time operation for clearing the portfolios of the banks with the burdens shared by the budget and the banks.

Before moving on to the specificities of the Bad Credits Act we will mention that during the period from April 1993 to the end of the year when the National Assembly passed the act the issue of the so called bad credits was being widely discussed in the specialised newspapers and magazines. Prevalent in these publications was the one-sided defending of either the banks or the enterprises. The problem was seldom interpreted as multifarious factor for the progress of the reform.