For Bulgarians, brief love affair with credit comes to bitter end

When Dobromir Kyurkchiev purchased a new home in Sofia, he took out a 45,000 euro ($58,875), 25-year loan. A real estate broker himself, he was familiar with loans and made certain the contract provided a fixed rate. About five years later, though, his monthly payment unexpectedly jumped 20 percent. 

He says the bank told him they’d decided to increase interest rates even though Mr. Kyurkchiev’s contract did not allow for adjusted rates. Despite appealing to consumer protection agencies, Kyurkchiev says he received no help from the government and he was unable to persuade the bank to return the loan to the original interest rate.

The only option available was to pull together enough money to pay off the loan in full, something that he managed thanks to a successful year of work. But that’s an option he says most of his clients who fall victim to the same problems cannot manage.

“We have a huge number of clients like this,” says Kyurkchiev. “The middle class, the young people between 25 and 35 who had a nice job and didn’t think about the future took loans and made a downpayment. They didn’t think about renovations or repairs. Then if they become unemployed they immediately lose everything because the banks don’t want to negotiate.”

A consumer credit crisis

Amid ongoing protests in Bulgaria that succeeded in forcing the resignation of the prime minister last week, a consumer credit crisis is among the many issues now challenging Europe’s poorest country.

In the first decade of the millennium, many in the former communist nation were unfamiliar with credit and overindulged in debt spending in an era of new free market policies. Now many of those who borrowed are drowning in debt and suffering from loose bank regulations and scant lender protection.

Bulgarians’ economic woes were what brought them to the streets when soaring electric prices began cutting too deep into many households’ budgets. Most Bulgarians are quick to explain that, comparatively, their electric bills are not that different than other places in Europe. The problem is that their incomes, which are on average less than $550 per month, are so low they’re easily crippled by minor fluctuations in price.

“The truth is that people are definitely poor. At the moment, there’s a relative decrease in the incomes and a relative increase in prices so it hits a large group of people,” says Rumyana Kolarova, a political science professor at Sofia University.

A leap in the use of credit

In this economic climate, loans have proven particularly problematic for Bulgarians, who often spend more than half their income on utility bills alone. It wasn’t until the late 1990s, when Bulgaria embraced a more free market system, that consumer loans first began appearing in a significant way. In 2000, Bulgarians still used only minimal amounts of credit with household debts accounting for less than 5 percent of the country’s GDP. Now it’s more than a quarter of Bulgaria’s GDP.

At the peak of Bulgaria’s credit rush in 2007 and 2008, one-third of Bulgarians took loans and of that group, more than 50 percent borrowed the equivalent of their annual household income to make a single consumer purchase.

At the same time, Bulgarians were subject to little protection from banks. During that period, the average credit inspector would have been confronted with almost 400 applications per day, leaving almost no room for oversight of most loans.

A costly combination

This proved particularly dangerous for many Bulgarian consumers eager to make luxury purchases after decades living under the austerity of the communist period but who had lacked a fundamental understanding of how to manage a budget. As in many former communist countries, credit and capitalist financing systems are still misunderstood by a number of people who grew up without learning about basic economic concepts such as supply and demand.

Consequently, many low-income Bulgarians overextended themselves by taking out loans they can’t afford to repay. About 22.5 percent of consumers defaulted on their loans as of January and the country is experiencing a record number of foreclosures, which increased by a staggering 300 percent between 2008 and 2011.

Making matters worse for consumers struggling to make loan payments, Bulgaria does not have any bankruptcy laws. Until a recent legal change, some banks would not allow borrowers to repay a loan ahead of schedule, and banks are still permitted to change interest rates without warning.

“There is some chronic short-sightedness from politicians, businessmen, and even ordinary people concerning economic matters,” says Boris Gurov, an economic sociologist at the Bulgarian Academy of Sciences. “It’s a very distinctive feature of Bulgarian crises. Bulgarians are in a way even more individualistic than Americans. They don’t have a clear idea that their actions have consequences for others or themselves.”

Just five or six years after many residents had eagerly moved toward a more free market system, the nation’s transition away from communism is now being called into question. A number of those who’ve continued to protest in Bulgaria are calling for a reexamination of the state’s privatization policies and more regulations.

“The public policies are not very robust because there’s no long-term vision. It’s their failure to come up with some sort of strategic policies,” says Dimitar Bechev, a senior policy fellow at the European Council on Foreign Relations. “Now with the crisis, much of the pro-market consensus is crumbling.”