* Bondholders to pursue legal remedies -sources
* Angry depositors at Corpbank demand access to funds
* Central bank says deposit payments possible after Oct 5
By Matthias Williams
LONDON, Aug 11 Bulgaria's Corporate Commercial
Bank (Corpbank) failed to make the final payment on a
dollar-denominated bond that matured on Friday, two bondholder
sources said, increasing the risk bondholders will take legal
action against the state.
A group of angry Corpbank depositors protested on Monday in
front of the central bank in Sofia, demanding access to their
accounts. Deposits have been frozen even though Bulgarian law
provides for a deposit guarantee of up to 100,000 euros.
Bulgaria's fourth-largest lender has been shut since late
June, when a week-long run on deposits prompted the central bank
to seize control of Corpbank and freeze its operations, in the
country's worst banking crisis since the 1990s.
Bulgarian authorities' efforts to rescue the lender have
been derailed by politics, however.
The Socialist-led coalition government resigned in July, and
its president, who appointed an interim government until
elections in October, said no action could be taken on Corpbank
until an independent audit into its books was completed, around
the middle of October.
The central bank and the finance ministry have sent a letter
to the European Commission explaining that they had no legal
means to resume payments of guaranteed deposits until possibly
after the Oct. 5 polls.
Reuters reported in July that a group of bondholders,
including U.S. and European hedge funds and financial
institutions, had formed a creditors' committee and hired legal
representation in Bulgaria in the event the government tips
Corpbank into insolvency.
"On Friday Aug. 8, Corpbank, fully under the control of the
Bulgarian National Bank, missed the final payment on its bond
after previously missing a coupon payment in July," a group of
Corpbank bondholders familiar with the process told Reuters.
"Given the lack of any substantive communication from the
government, bondholders will pursue legal remedies against the
state and the bank. Bulgaria's politicians not only risk a
protracted and expensive legal battle, but lasting damage to its
reputation as an investment destination in the EU," they said.
The European Commission has urged Bulgaria to start making
at least partial payments to depositors.
"We want the bank to open now. We want to be treated like
European citizens, but obviously this is not the case," said
Penka Ilieva, 36, who travelled from her home town of Dupnitsa
to protest in Sofia.
The central bank and the finance ministry said on Monday
that under current Bulgarian law, guaranteed deposits of up to
100,000 euros can be paid only if the bank is declared
insolvent. It also said that partial repayment of depositors
before that could jeopardise any rescue effort.
Bulgaria's Deposit Insurance Fund has only 2.1 billion levs
at its disposal, while the guaranteed deposits amount to about
3.7 billion levs, and the shortfall can only be covered by a
state-guaranteed loan, which needs parliamentary approval, the
"Because at the moment the parliament is not functioning,
changes in the laws are not possible, nor is ensuring the
additional 1.6 billion levs needed to repay the guaranteed
deposits," the letter said.
"Such decisions can be made from the next parliament after
the Oct 5. election"
The crisis prompted the central bank last week to ask the
International Monetary Fund to carry out an in depth review of
Bulgaria's financial sector.
The Corpbank bond had already missed a coupon payment in
July, prompting Moody's rating agency to downgrade the $150
million bond to Ca from B3.
"The maturity payment was missed on Friday," a London-based
hedge fund manager told Reuters. "There is a seven-day grace
period. We are working through our legal options right now."
(Additional reporting by Tsvetelia Tsolova in Sofia; editing by