This report does not constitute a rating action.
Bulgaria's long road to euro ascension continues. Last week, Finance Minister Asen Vasilev confirmed that the country had begun negotiations with the European Commission on introducing the euro as parallel legal tender for transactions in the country from Jan. 1, 2024, in addition to the lev. Bulgaria has operated a currency board with the euro since 1997.
When Bulgaria joined the EU in 2007, the accession treaty included a requirement for the country to eventually join the eurozone if it meets the "convergence criteria". In 2020, Bulgaria acceded to the Exchange Rate Mechanism (ERM II)--the waiting room for eurozone accession. However, elevated post-COVID-19 inflationary stress and a prolonged period of reform inertia has stalled progress.
In this report, S&P Global Ratings answers frequently asked questions on the status and ratings impact of both the parallel currency introduction and ultimate eurozone ascension.
Frequently Asked Questions
What is the status of Bulgaria’s eurozone ambitions?
Bulgaria intends to join the euro area Jan. 1, 2025.
There is no specific timeline on when a country must adopt the euro after joining ERM II. However, there are annual feasibility assessments of eurozone membership against so-called "convergence criteria", which primarily deal with price stability, public finances, exchange-rate stability, and long-term interest rates.
Historically, member states have spent 2-10 years in ERM II.
| ERM II inclusion and eurozone accession date | ||
|---|---|---|
| Country | ERM II entry | Eurozone accession date |
| Croatia | July 2020 | January 2023 |
| Cyprus | May 2005 | January 2008 |
| Estonia | June 2004 | January 2011 |
| Greece | January 1999 | January 2001 |
| Latvia | May 2005 | January 2014 |
| Lithuania | June 2004 | January 2015 |
| Malta | May 2005 | January 2008 |
| Slovakia | November 2005 | January 2009 |
| Slovenia | June 2004 | January 2007 |
What would be the overall credit effect of using the euro as a parallel currency?
Unilaterally introducing the euro as parallel currency would not affect our sovereign rating on Bulgaria, because this would not represent formal eurozone accession; the country would still not be part of the Eurosystem and would gain no representation at the level of the European Central Bank. Furthermore, the lev would remain the primary legal tender in the country.
However, we think last week's decision suggests that political commitment to the euro remains strong. Bulgaria recently exited a prolonged period of political instability following five general elections in just two years, which was detrimental for the country’s eurozone ambitions. Although the current government consists of an uneasy coalition of two parties, with a few sticking points, we see a commitment from both parties to pursue euro adoption.
Both government parties campaigned on a pro-EU and eurozone agenda, and we see strong willingness to cooperate on judicial and other reforms required ahead of eurozone accession. Also, the revised budget for 2023 is now in line with the Stability and Growth Pact--a specific requirement for any potential new member ahead of eurozone accession. Our next scheduled rating review for Bulgaria is Nov. 24, 2023.
What would be the rating impact if Bulgaria joined the eurozone?
We could raise the ratings on Bulgaria if it became a eurozone member.
Currently, the sovereign's currency board regime fosters economic stability but effectively constrains the central bank’s own policy options, which must align with the central bank operating the currency to which the domestic currency is pegged to. This compares unfavorably with full membership in the Eurosystem, in which the European Central Bank operates one of very few global reserve currencies with a broad array of tested and established monetary policy instruments at its disposal. The sovereign ratings on eurozone members therefore generally benefit from a more favorable monetary assessment compared with our current monetary assessment on Bulgaria. However, we also reflect the individual eurozone members’ reduced monetary flexibility relative to sovereigns with their own central banks.
Similarly, joining the eurozone could improve our view of Bulgaria’ external assessment, in particular its access to external liquidity, given the euro’s use in international transactions. It could also improve our view on the sovereign's net external debt position. We currently deduct its monetary base from the reserves of the Bulgarian National Bank, because we consider the reserve coverage of the base is critical to maintaining confidence in the currency board.
What Are The Main Obstacles To Bulgaria’s Euro Adoption?
We still see several issues ahead of Bulgaria becoming a eurozone member. These include the following:
- Meeting some of the formal "convergence criteria", primarily the inflation criteria, could still be challenging. This requires inflation to be no more than 1.5% higher than those of the three best performing EU member states for the year before the assessment. However, it is possible to exclude individual member states from the calculation, as happened for instance for Croatia’s eurozone membership assessment in 2022. For now, we believe Bulgaria will not meet the price stability criteria in 2024--a requirement for euro adoption on Jan. 1, 2025. However, we think the country’s inflation levels will decrease further in 2025, toward the EU’s average.
- A prolonged period of political instability has hindered Bulgaria's legislative preparations for eurozone accession. Should the current government fracture, we think further delays of eurozone accession are likely.
- Political considerations outside Bulgaria's control could have an influence. The ultimate decision on membership lies with the eurozone's finance ministers, the Eurogroup, and the EU Council.
- Euro adoption might require a public referendum, although this appears increasingly unlikely. If it still happened, it could further delay euro adoption. Popular opinion in Bulgaria on euro adoption is split.
| Primary Contact: | Niklas Steinert, Frankfurt 49-693-399-9248; niklas.steinert@spglobal.com |
| Secondary Contacts: | Karen Vartapetov, PhD, Frankfurt 49-693-399-9225; karen.vartapetov@spglobal.com |
| Christian Esters, CFA, Frankfurt 49-693-399-9262; christian.esters@spglobal.com | |
| Frank Gill, Madrid 34-91-788-7213; frank.gill@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.