According to BNB sources by the 30th of June the so called bad credits in leva come up to 32 billion leva both principal and interests and in hard currencies (that is credits granted in convertible currency) amount to about 1.808 billion dollars. The act passed by the National Assembly preserved these sums as quota that cannot be exceeded.

The legislators approved state bonds to cover the principal and the interests accrued by June the 31st 1993. After that date to the end of the year the interests calculated go against the reserves of the banks. The banks have not received any payments of these interests, so the term against their own reserves is practically conventional.

Summarizingly bad credits can be written off in the following ways:

The most radical, but at the same time practically inapplicable approach implies the adoption of an act to oblige the banks to write off the existent assets (non-performing debts of 1990, the interests included) against their own capital (assets, reserves, additional). This has been the way of solving a similar problem in the Kingdom of Bulgaria during the years 1932 - 1936. A Debtor Act was passed and the banks which did not stand to it when implemented were liquidated and later consolidated in a sense in a new joint stock bank (Bulgarian Credit Bank) with a high percentage of state participation. This experience might have been helpful in 1990 before the interest rate going free in 1991. This could not have been realised in 1993 as thus the capital adequacy would have been damaged of the banks whose consolidation had been performed on other principles. The estimated commercial banks' own capital by May the 30th 1993 totaled a 25 billion leva.

It can be regretted that at the beginning of 1991 the Great National Assembly took long days to debate ways to reimburse people recipients of loans to be used for house construction and in the meanwhile did not touch upon the same kind of problem encountered with the debtor-enterprises; who were at that in many of the cases committed to paying loans negotiated, received and set forth by others at a different level and in manners having nothing to do with the market conditions of crediting.

The practice of other former socialist countries offers a different solution to the problem. It is targeted at the relieving the commercial banks of the burdens of non-performing incomings. The bad credits are being transferred to one bank (called "hospital-bank" or "dustbin"). Structurally it usually belongs to the Ministry of finance and the state reimburses the commercial banks by means of state bond loan. The obligations of the enterprises are not written off but transferred to the "hospital bank " and later on special programs decide the fate of these enterprises. The incomes from selling debtor enterprises come to the same bank. This was applied in Czechoslovakia as early as at the beginning of 1991. It is difficult to argue against the economic value of such a solution having significant advantages, but disregarding experts' recommendations it was not adopted in our country in 1991 when the first 5 billion dollar transfer was enacted. It was just as impossible to apply this way in 1993 inasmuch as the approved legal regulations were strict in their requirement for writing off debts of enterprises.

The National Assembly was right in its wording as it was not already 1991, nor 1992 - it had all taken quite a long time - the privatization had to start at the long last and that in itself is difficult to realise if as late as in 1993 programs are initiated to consider what is to be done with the debts of the enterprises.

If we take for given that the members of the parliament intended to clear the portfolios of the banks and at the same time to write off the debts of the enterprises, what is left to be done is to figure out the conditions of the state security loan to compensate for the bad credits.

According to the Bad credits Act during the first two years the interest on the issued bonds is 1/3 of the base interest rate; during the second two years - 1/2 of the base interest rate ; during the fifth and the sixth years - 2/3; from the seventh to the twenty-fifth the interest is equal to the base interest rate. It deserves to be noted that this interest scheme is provided in a BNB letter of January 1993 for the second tranche of 5 billion leva coming from the 1992 budget. It was adopted for the one-time operation for the clearing of all bad credits granted by the end of 1990, in accord with a conviction of BNB's that it would not pose problems to the banks , but will take burdens off the expenditure parts of the budget in the years to come. Consequently, after the act entered into force the big holders of bad credits do not miss a chance to voice their discontent with this amount of interest on the state bonds.

The state bonds issued to substitute for the leva credit have amortization period of 25 years with a 5-year grace period and the interest on them is to be paid twice yearly on April the 1st and October the 1st every year.

For the foreign currency credits the state securities are denominated in dollars. This was undertaken to preserve the assets of the banks and to compensate to a certain degree the losses of the reduced interest on the leva credits. The bonds denominated in dollars were issued at the beginning of June 1994, instead of at the end of 1993. The delay has been attributed to the impossibility to fit the banks accounts into the 1.808 billion dollar quota predetermined.

The date of issue fixed by the act is January the 1st, 1994; while the leva bonds are to be issued on October the 1st, 1993.

The interest is to be paid on July 1st and January 1st amounting to the six-month LIBOR for US dollars for the period in question.

The impact can be considerable on the progress of the economic reform of the opportunity provided in the Act the securities in leva and dollars to be used as means of payment in the privatization deals of state and municipal enterprises. The rest of the presentation will deal with this issue in some more detail.

The Act sets forth more rigid terms for debtor enterprises. Unlike in the 1991 and 1992 operations the debt substituted by bonds is not automatically written off. The enterprises book the debts as obligations of the state budget amounting up to the principal. The interests, also covered by state bonds increase the enterprises reserves. These obligations do not bear interest and the principal is not paid only during the first six months. After that period and in accord with the assessed draft program for the financial recuperation of the respective enterprise the debt is being decided whether to become effective or to be written off. It is explicitly specified that debts shall not be written off of enterprises who after year 1990 have increased their wages (as shown by the wage-increase taxes paid) and not spent on repaying debts.

By the end of June the aggregate credits covered in leva bonds is below the amount stated in the Act, namely 26,391,832,000 leva. The unclaimed amount of about 6 billion leva results from the strict implementation of the criteria to be met by the loans to be offered for writing off by the banks. One option is this unclaimed sum of 6 billion leva to be cleared to increase the quota of the dollar denominated bonds. Unrestructured into state debt here remained interests worth 71,094,432 US dollars, as well as a set of special credits managed by BNB before 1990 152 million US dollars worth.

This option has not been discussed, but it is very unlikely to be adopted if only because an operation of this kind has to be passed by the National Assembly, which is approaching the end of its summer session.

The one-time operation for clearing the banks' portfolios has been accomplished. Its leva credit parts were included in the 1993 accounts and its foreign currency credits will be booked by June 30th, 1994.

It is very likely the meeting of the requirements for the so called recuperation programs and the concluding of contracts between the debtor enterprises and the Ministry of finance to take quite some time. The Act requires the valuation of each enterprise to be grounded on a number of criteria as set forth by the Council of Ministers (Ordinance # of 1994).

The Council of Ministers approved of three regulations to implement the Act:

1. Regulation for the procedures and conditions of acquisition, servicing and paying of long-term state bonds (Council of Ministers Ordinance #33 of February 14th, 1994).

2. Criteria for the financial recuperation programs (Council of Ministers Ordinance #45 of March 3rd,1994)

3. Regulation for the order of participation in the privatization of the holders of long-term state bonds issued to the Settlement of Unpaid Credits granted before December 31st, 1990 Act.

The first of the enlisted regulations regularized the relationships between the commercial banks whose portfolios were cleared and the Ministry of finance who took up the debts by issuing the security loan. This takes the form of contracts under certain conditions. As to the amounts of bonds issued by banks the Ministry of Finance has to notify the BNB where special registers keep trace of the long-term state bonds issued. When deals are concluded with these bonds the latest data are to be recorded in these registers as to who sells and who buys and what the price is for the respective deal. When the deals are between the banks and legal or physical persons accordingly, a certificate has to be issued for the buyers of bonds. When using the bonds as means of payment in privatization deals they are considered matured state securities. A separate regulation (Ordinance #36 of 1994) of the Council of Ministers approves of the order of using bonds in privatization.

It has been agreed the leva bonds to be accepted as means of payment by their nominal value despite their usually lower market price. This is not acceptable in the privatization deals for the bonds denominated in dollars and they participate by their market values. The general schemes for the implementation the bad credits act invented this element for the following purposes:

First, to accelerate the privatization of the state enterprises inasmuch as one of the reasons for the slow movement forward of this process is the inavailability of free capitals at very expensive credit.

Second, to speed up the performing of the public debt, as the bonds received by the ministries or the Privatization Agency when selling enterprises are actually debt servicing. It is worth mentioning that this procedure has been resisted on the part of the Privatization Agency. It is understandable as the agency receives 7 per cent of the total amount if paid as the normal practice goes. It is not hard to see this objection is to be overcome by funding the Privatization Agency from the state budget. It is very important economically to decrease the public debt formed at the moment by the yearly budget deficit, essential in which remains the impact of the payment of interests on foreign debts; on debts lent by the BNB and the security loans in question (of 1992, 1993, 1994). Interests burden the budget far above the admissible for such purposes levels - so the early settlement of parts of the security loans should have its consequences for the economic development.

It deserves to be noted that the use of the securities as means of payment in the privatization also influences the aggregate credit amounts to be further properly analyzed. The credit method is used more and more widely in trading the bonds which deviates from the original scheme.

The bad credits Act still has to be implemented in its part concerning the relationships between the enterprises and the Ministry of finance. According to article 11 of the Act the ministries acting as general assembly in respect to the treated in the operation enterprises together with the enterprises themselves produce programs for their financial recuperation. These programs are not ready by June 1994. They should be approved by the ministries if meeting the special regulations criteria and indicators. These serve the grounds for the minister of finance to decide whether to enact the real clearing of the obligation of the respective enterprise or to restructure it back as obligation to the state to be serviced on contract terms.

The opinion is widespread that the state through the Ministry of finance should be persistent about the servicing of the loans covered by security loans. This view optionally implied in the Act can only be supported if the specificities of the loans before 1990 , the subject of the beginning of this presentation are not understood in their depth. Even if the arguments given be disregarded, what happened to the enterprises during years 1991 to 1993 has to be taken into account. In 1991 the original euphoria with the change and external reasons made the enterprises loose the markets they used to have under the motto of re-orientation to the west. This turned out to be one of the illusions of the transition and only after the western experts themselves clearly pointed that for us it is better to stick to our old markets actions were undertaken to return to them. But the time wasted forced upon many economic entities the reduction of their output, decapitalization, narrowing the opportunities for current maintenance let alone development. It is now at the long last that the enterprises are recovering and very slowly at that in terms of finding markets. It will be a blunder if at this very moment they are laid with burdens from ten years before. This will leave them with no chance for stabilization. And this would understandably have negative impact on the overall progress of the reform and the intentions to avoid any further plummeting of the output.