* VTB bank won’t inject capital into Corpbank
* Shareholders must decide whether to commit funds by Friday
* Bulgaria sovereign bond sale on track - sources
* Moody’s cuts Corpbank rating by two notches
* Bulgaria CDS at highest level since Nov 2013 (Recasts with PM quote, adds bond sale, Moody’s downgrade, details)
By Tsvetelia Tsolova and Matthias Williams
SOFIA, June 24 (Reuters) - Shareholders are unlikely to rescue Bulgaria’s Corporate Commercial Bank (Corpbank), Prime Minister Plamen Oresharski said on Tuesday, the strongest signal yet the country’s fourth- largest lender will be nationalised by July.
Customers rushed to withdraw money from Corpbank last week after media reports of suspect deals involving the bank. The country’s central bank took control of Corpbank, froze its operations and started rescue talks.
Oresharski’s beleaguered government, punished by voters in European Parliament elections in May, denied on Monday it had bungled its response to the Corpbank run. Late on Friday, the finance ministry said talks with shareholders about a rescue were “serious”.
The country is likely to hold a snap election in September or October.
The crisis has drawn renewed attention to the investment climate in Bulgaria, the European Union’s poorest state, which has been dogged by political instability, sluggish economic growth, endemic corruption and slow-moving reforms.
Both Corpbank and its biggest investor, Bulgarian businessman Tsvetan Vassilev, deny any wrongdoing.
Vassilev owns just over half of the company, Oman’s sovereign wealth fund has around 30 percent and the investment arm of Russian bank VTB, VTB Capital owns 9.1 percent.
The government has given them until Friday to commit funds to a capital increase, but the prospect of a private rescue faded as VTB announced on Tuesday it had no plan to inject capital into Corpbank.
The Omanis have not yet commented.
If the rescue talks fail, Bulgaria plans to nationalise Corpbank with an infusion of capital from two state institutions.
“After an estimate of the assets and the liabilities, the law requires the current shareholders be asked to cover the shortage and ensure liquidity,” Oresharski told reporters.
“This is something we doubt will happen, obviously the whole society doubted it. That is why there were tensions and that led to the plan that we presented to you.”
The central bank has begun delving into Corpbank’s accounts to find out what went wrong and has appointed independent auditors to determine how much money Corpbank will need.
It says Corpbank is not bankrupt, that its problems were an isolated case and that they posed no risk to Bulgaria’s banking system.
The crisis has hit Bulgaria just as the government was gearing up for a European investor road show to raise 1.5 billion euros from bond sales. The money is needed to roll over bonds maturing in January and finance the budget deficit.
However, early talks with investors in Germany - the first leg of the road show - suggested Corpbank’s problems and a recent sovereign credit rating downgrade would not derail the sale, two sources familiar with the talks told Reuters.
Corpbank’s problems prompted ratings agency Moody’s to downgrade the lender by two notches to B3 on Tuesday, and said a further downgrade was possible if the bank was not stabilised quickly.
The fall-out from the bank run is already being felt in international markets, with Bulgaria’s credit default swaps (CDS) rising to their highest since November 2013, according to Markit data.
Bulgaria’s finance ministry rejected all bids for 50 million levs ($34.8 million) in two-and-a-half year treasury bonds late on Monday after buyers demanded higher yields.
Investors are now wondering “why the government and the central bank allowed the (Corpbank) issue to go this far without ringing the alarm bells at an earlier stage?” said Simon Quijano-Evans, an analyst at Commerzbank.
He said investors should take “a cautious approach” for the time being as there was a volatile political backdrop but the authorities were looking to resolve the Corpbank situation as quickly as possible.
Standard & Poor’s downgraded Bulgaria’s sovereign credit rating to one notch above junk earlier in June, before the Corpbank crisis, citing political turmoil.
“When something like (Corpbank) pops up then it certainly jumps up on the risk radar of investors... The rating is right to the bottom of investment grade so there are obviously reforms that need to be done now,” said Quijano-Evans.
$1 = 1.4389 Bulgarian Levs Additional reporting by Megan Davies in MOSCOW, Angel Krasimirov in SOFIA and Carolyn Cohn in LONDON; Editing by Tom Pfeiffer and Erica Billingham