Here I should point out, as the Report does on different occasions, that acknowledging the impact of the second recession is crucial, because there is a tendency to ignore it, as though it were an incident without importance when actually it was fundamental to how events unfolded and in terms of its impact on our credit institutions. Fourthly, there were errors of perception as to how the imbalances that built up with the real estate bubble – among others, the imbalances on bank balance sheets – could be corrected. It was thought they could be corrected mildly, in a gradual fashion. Circumstances showed that this expectation was overly optimistic because the correction was rapid, brutal and with consequences that have not yet been entirely overcome. A further reflection – although I should say here that the opinion cannot be construed as forceful, or very certain – is that the attempt to minimise in the short term the cost of the resolution of the banking crisis for public finances by means of a gradual approach, facing problems as and when they emerged, might ultimately have involved committing a greater volume of public resources than, say, a more aggressive or more ambitious approach from the onset of the crisis. I insist, though, that this is a question for which there is no reply exempt from objections and counter-arguments. In any event, the Bank could obviously not act independently of the course of our public finances and of the decisions by other authorities.
In the context of the euro area this is due to the absence of a fiscal union, the different fiscal positions of the individual countries, and the different, but on the whole high, levels of their debt burden. Against this backdrop, Bulgaria's fiscal position continues to be solid, with its second lowest debt-to-GDP ratio in the EU. However, the country's fiscal position faces some serious potential risks arising from the severely disrupted budgeting process over the last two years and the trend, emerging in this period, towards continued loosening of fiscal policy. The issue is not so much the high expenditures which were needed and largely unavoidable, especially during the Covid-19 crisis, but rather their quality. The higher expenditures in that period, which led to a higher deficit, were meant to be targeted and temporary, and this was the right approach. Within the strongly fragmented budgeting process, however, these targeted and temporary expenditures mostly became allencompassing and continuous, and tended to increase further. In this case risks occur along two lines. On the one hand, the persistent and progressive loosening of fiscal policy could bring us back into the long-forgotten times of high deficits, growing debt, and liquidity difficulties of the budget. This would in turn adversely change the internal structure of budget expenditures, with increasing debt service expenditures, especially in the context of rising interest rates, at the expense of investment and social expenditures.