UPDATE 4-Bulgarian central bank says banking system under attack

Fri Jun 27, 2014 4:53pm EDT

Related Topics

* Says there is an attempt "to destabilise the state"

* Bank run revives memories of sector crisis in 1990s

* First Investment Bank shares down 24 percent

* Political parties agree to hold snap election on Oct 5 (Adds finance minister, paragraphs 15-16, 31; more background)

By Tsvetelia Tsolova and Gareth Jones

SOFIA, June 27 (Reuters) - Bulgaria's central bank said on Friday there was a systematic attempt to destabilise the country through attacks on the banking system and vowed to protect citizens' savings.

Depositors queued in the capital Sofia to withdraw funds from one of the country's biggest banks and its shares slumped, worsening a crisis that has shone a light on weak economic governance in the poorest European Union state.

Last week, the central bank took control of Corporate Commercial Bank (Corpbank) after a run on deposits sparked by media reports of suspect deals involving the bank and its top shareholder.

The central bank said Corpbank's problems were isolated. Economists and Fitch Ratings agency also played down the risk of contagion, while foreign banks with subsidiaries in Bulgaria - accounting for more than two thirds of the Balkan country's banking system - insisted their operations were safe.

But the crisis spread on Friday as the country's third-biggest lender, First Investment Bank, said it was under an "unprecedented criminal attack".

Reuters witnesses saw queues of between 15 and 30 customers build gradually after some bank branches opened on Friday in Sofia. By early afternoon, there were around 70 people queuing outside one central branch of First Investment Bank.

The bank said depositors withdrew about 800 million levs ($555.88 million) and announced it would close all branches at 1200 GMT until Monday for "logistical reasons". It said it had enough funds to meet clients' demands.

A spokesman said Internet banking services and cash machine withdrawals would continue to function over the weekend.

"I was told to come here and take my money out," said a 32-year-old woman in one bank queue who did not want to be named. "I hope they do not close the doors in front of our noses."

Interior Minister Tsvetlin Yovchev said the government was investigating attempts to destabilise the banking system. He said there had been a concerted phone and Internet campaign to spread rumours about other banks.

Prime Minister Plamen Oresharski said there was no cause for concern. On Friday, leaders of the main political parties set Oct. 5 as the date for a snap parliamentary election, putting an end to weeks of political uncertainty that has coincided with the bank runs.

"The risk of a widespread run on banks increases in a situation like this, and it's pretty important that the authorities are on top of things," said Lars Christensen, chief emerging markets analyst at Danske Bank.

FEAR OF CONTAGION

The crisis has knocked an already weak economy and revived concerns about persistent corruption in the country, which joined the EU in 2007. Many Bulgarians who lost money in a banking sector meltdown in the late 1990s are wary of official assurances that their savings are safe.

Both Corpbank and its biggest investor, Bulgarian businessman Tsvetan Vassilev, have denied any wrongdoing.

Finance Minister Petar Chobanov told Bulgarian state TV late on Friday the government was working closely with the central bank and political parties to contain the crisis.

"I can categorically state that no banks are at risk at this moment. The current situation has nothing to do with (the crisis) in 1996-97, the banks are operating normally and they have good liquidity," Chobanov said.

Comments on Thursday by a deputy from the ruling Socialist Party that another bank may suffer a similar fate to Corpbank accelerated the steep declines in Bulgarian bank stocks over the past two days.

The lawmaker, Anton Kutev, told Nova TV he thought there had been a deliberate attempt to "break" Corpbank and that "someone is trying to pull down another bank, as far as I feel". He did not say who might be trying to take such action.

"In recent days there has been an attempt to destabilise the state through an organised attack against Bulgarian banks without any reason," the central bank said in its statement. It said First Investment Bank had been a major target.

The central bank urged all state institutions to work together to protect financial stability and take legal action against those spreading "untrue and ill-intentioned rumours" about the health of Bulgaria's banks.

It condemned what it called "criminal actions (that are) directly aimed at the savings of all Bulgarian citizens and financial stability as an essential element of national security".

PAINFUL MEMORIES

Shares in First Investment Bank had shed 24 percent by market close on Friday. Other bank shares were also down sharply. Bulgarian credit default swaps were at 121 basis points, close to a 15-month high reached earlier this week.

The lev currency is tied to the euro through a currency board, so is shielded from the turmoil.

"The whole banking sector is being sold off due to the problems around Corporate Bank. Investors are worried the problems can spread," said Boyan Gatsev, a trader with Varchev Finance.

Greece's National Bank said it had not seen any deposit outflows at its unit in Bulgaria and it had no exposure to Corpbank. A spokesman for Raiffeisen Bank International in Vienna said there were no problems at its Bulgarian business.

The bank run has revived painful memories of the sector crisis of the 1990s that bankrupted 14 banks and comes at a bad time for the minority government, which has struggled to revive economic growth and stem a sharp drop in foreign investment.

Ongoing political instability prompted Standard and Poor's to downgrade Bulgaria's sovereign credit rating to one notch above junk earlier in June.

The leader of the main opposition party said Bulgaria should call upon the expertise of the International Monetary Fund.

"The IMF should be called immediately. This is the only option. The next budget should be prepared by the Fund," said Boiko Borisov, whose centre-right GERB party is tipped to win most votes in the general election.

But economists played down the risk of an economic crisis in Bulgaria, saying its banking sector was still relatively solid and its government borrowing was very low, giving it leeway if it were ever called upon to support the country's banks.

Asked about the possible involvement of the IMF, Finance Minister Chobanov said: "Let's try to deal with our own forces and have more confidence in our abilities."

Although the cost of insuring Bulgarian government debt rose last week, the government has managed to launch a 1.5 billion euro bond sale needed to roll over existing bonds and finance the budget deficit - a fact Chobanov said proved "the stability of the banking and financial systems". (Additional reporting by Angel Krasimirov, Matthias Williams, Stoyan Nenov and Sujata Rao; writing by Gareth Jones; editing by Tom Pfeiffer and Robin Pomeroy)

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