Tuesday, November 29, 2011

WHAT HAPPENS WHEN A CURRENCY COLLAPSES?


Fifteen years ago, both Bulgaria and Romania went through rampant inflation linked to a financial crisis. Bucharest narrowly avoided the collapse, but Sofia was less fortunate and experienced a meltdown of the sort Greece is currently trying to prevent.

"Those were very bad times. Every day my salary was worth less and less, and there were fewer things I could buy with it," says Krassimira Komneva from the Sofia-based Most Foundation, an employment and education outfit.

Back in 1996, Komneva was doing office work in a construction company. She recalls how the salary was late when the currency collapsed. "When I received it one month later, it was worth much less than expected. We all hurried to buy food, bread, oil. The prices were just crazy," she recalls.

According to the International Institute of Finance, inflation in Bulgaria hit 174.4 percent in 1996 and a record of 1,077.5 percent the next year. Its curency, the lev, went from 500 per US dollar in late 1996 to 2,200 per US dollar in February 1997.

Food shortages and a harsh winter drove people to despair, with mass rallies ultimately forcing out the post-Communist government largely blamed for the disastrous policies that led to the currency collapse.

"For the average people, it was just terrible. Nobody really understood what happened, the only thing we could see was that it all ended in disaster," says Komneva.

The central bank was subsequently stripped of its powers as the country entered in a "currency board" agreement with the International Monetary Fund (IMF) and other international lenders in July 1997, with the lev being pegged to the German D-Mark. Aimed at lowering inflation, boosting national reserves and restoring market confidence in the country, the currency board nevertheless seriously dented Bulgaria's sovereignty.

Romania only narrowly avoided a similar fate in the same period.

According to former President Emil Constantinescu, elected to power in November 1996 as the first non-Communist leader of the country, the country's national reserves when he took over had just 600 million US dollars, compared to current levels of €20 billion. At the same time, Romania had taken up some 5 billion US dollars in loans, which had to be paid back during his mandate.

"All of this led the IMF to suggest Romania should declare default on its debt. The second day after Parliament had confirmed my mandate, I received international envoys who told me this and gave it to me in writing," Constantinescu said in a 2006 interview with Gardianul newspaper.

Like Bulgaria, Romania was struggling with failing banks - both state and private-owned. Taxpayers' money was poured into the ailing state giants to help save them after they had lent billions to former regime protegees and their respective companies.

Meanwhile, most so-called private banks were in fact pyramidal schemes "designed to steal the money from regular citizens, set up by the mafia of the former Securitate (Communist secret police)" Constantinescu recalled.

Inflation peaked at 150 percent in 1997 and Romania had to seek an IMF loan of 500 million US dollars. It also had to privatise and profoundly restructure its state enterprises. But it avoided the embarrassment of having its central bank replaced with a currency board.

Not everyone was miserable during those years in Romania. To 41-year old trader Paul Marian, those were lucrative times in Bucharest. He remembers people flocking to his exchange office to get rid of the quickly depreciating lei and turn them into more stable D-Marks, US dollars or Swiss francs.

"I made good money in those years, the exchange office was working well. Everybody was just crazy about buying foreign currency," Marian recalls.

A cap on 500 US dollars was put in place for each citizen and later on, "when things got crazy", traders were banned from selling or buying foreign currency at more than five percent above or below the central bank exchange rate, he says.

That put an end to the big profits earned by exchange offices which had mushroomed in every Romanian town.


To your success...

DETYCOON

STEVENS ADEOLA S.

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