This means that the positive impulse from fiscal stimulus will abate over the next year. The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing. Thus, while banks’ access to the capital markets has sharply improved, banks are still capital constrained and hesitant to expand their lending. Most importantly, some significant classes of borrowers – namely commercial real estate and small business – are almost wholly dependent on the banking sector for funds, and those funds are not easily forthcoming. The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending. In terms of the fundamentals, there are two problems. First, the capitalization rate – the ratio of income to valuation – has climbed sharply. At the peak, capitalization rates for prime properties were in the range of 5 percent. That means that investors were willing to pay $ for a $ of income. Today, the capitalization rate appears to have risen to about 8 percent. That means that the same dollar of income is now capitalized as worth only $ In other words, if income were stable, the value of the properties would have fallen by 37.5 percent. Second, the income generated by commercial real estate has generally been falling.
2  BIS central bankers’ speeches  Only three days ago, the capital markets provided the latest proof of the efficiency of the macroeconomic policies in Bulgaria and the resilience of our economy in the face of such a severe global crisis. Bulgaria’s global issue of 5-year euro-denominated bonds, marking our country’s return to the international bond markets after a decade, was a great success. The international investors’ orders oversubscribed the offered amount more than 6 times. Their strong interest has resulted in a very low annual yield of 4.436%. At present, only the highest-rated EU Member States can afford to pay a lower price for borrowing on the private capital markets. To conclude, we have achieved monetary and banking stability in Bulgaria during the last 15 years. They have been bolstered by the synergies of monetary and macroprudential mandates (including banking supervision) within the central bank, complemented by the prudent fiscal policies of several consecutive governments since 1997. The BNB representatives will be eager to discuss our knowledge today and tomorrow, while also looking forward to learning about the experiences of the other countries represented at this conference. I wish you a most fruitful exchange of views and ideas. Thank you very much for your attention. BIS central bankers’ speeches  3