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UPDATE 3-New Bulgaria govt aims to adopt the euro by 2013

Published 09/16/2009, 12:21 PM

* Finmin optimistic about Bulgaria adopting euro by 2013

* New govt aims to apply for ERM-2 entry in November

* Some analysts express scepticism

(Updates with analyst comment)

By Tsvetelia Ilieva and Anna Mudeva

SOFIA, Sept 16 (Reuters) - Bulgaria's new centre-right government has accelerated efforts to join the euro zone and aims to adopt the single currency by 2013 during its mandate, Finance Minister Simeon Djankov said on Wednesday.

Analysts said Sofia's bid was likely to meet resistance in recession-hit western Europe where the mood was against allowing more countries to join the euro zone in times of crisis, and Bulgaria itself had to heal its ailing economy first.

But some economists said adopting the euro in 2013 was still possible if the Balkan country kept inflation in check -- the only one of the official Maastricht criteria for euro zone entry it has not met yet.

Djankov said he had launched informal talks about joining the pre-euro ERM-2 waiting room. The cabinet of the GERB party, which won July general elections, is working to apply for ERM-2 entry in November, he reiterated.

"My key goal for the whole mandate is euro zone entry," Djankov, who is also deputy prime minister, told a news conference. "I firmly believe and I am optimistic that this will happen in this mandate."

Double-digit inflation and a current account deficit of over 20 percent of GDP in the past several years have hindered the Balkan country's efforts to join the ERM-2 mechanism so far, although the gap is not part of the entry criteria.

Rampant corruption and organised crime, which the previous Socialist-led government failed to tackle, were also among the reasons for keeping the EU's poorest nation away from the euro, EU diplomats have said.

The new government has undertaken steps to prosecute senior officials of graft and curb the grey economy.

SCEPTICIMS

Some analysts said they were surprised to hear Sofia repeating its intention to apply for ERM-2 in November as the message from Brussels had so far been negative.

"It means that either they (the government) are silly or they have indeed talked to the European Commission and something has changed," said Agata Urbanska of ING bank.

"I would be surprised if things have changed ... There is a huge contraction, the current account can only worsen not improve in 2010," she added.

Djankov said proving that Sofia had a different approach and was serious about reforms would guarantee euro zone entry.

"The new government must show that it is doing a job different from that of the previous government," he said.

The new cabinet has already won praise for cutting spending to avoid an end-year budget deficit that could put pressure on Bulgaria's lev currency peg to the euro.

Inflation is expected to fall to below 3 percent at the end of this year as a result of falling domestic demand and the global downturn, while the external deficit is seen shrinking to 11 percent from 26 percent at end-2008. [ID:nLG76433]

Other analysts said if Bulgaria met all of the Maastricht criteria, Brussels would not have a formal reason to deny its euro bid, even though political reasons were at play, too.

"2013 is possible," said Simon Quijano-Evans of Cheuvreux. "The main message we have got from the European institutions is that the Maastricht criteria are the most important. And if that is the case, the one challenge will be inflation."

He said government reforms could lure foreign cash flows back to Bulgaria and ease the risks arising from the still high external shotfall.

Sofia plans to keep the peg of 1.95583 levs per euro until entering the euro zone. The latest Reuters poll on the issue, taken in August, showed Bulgaria and neighbouring Romania adopting the euro in 2015. [ID:nLB691285]

(Editing by Toby Chopra)

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