The year 2005 was the second in a row in which the financial assets of Bulgarian households increased by 30 per cent, a report by UniCredit Group on New Europe showed on March 30. The group owns three banks in Bulgaria - Bulbank, HVB Bank Biochim and Hebros Bank. The assets amounted to 41 per cent of the gross domestic product (GDP) and in 2006 the figure is expected to reach 45 per cent. In this respect, however, Bulgaria is still well behind European Union countries. Concurrently, the debts of Bulgarian households have surged, mainly due to a rise in credits, which are transformed into real estate. The strong interest in properties has prompted a 30-per cent price jump. The per capita financial assets in Bulgaria stood at 1151 euro in 2005, with debts at 492 euro. The debt to asset ratio was 43 per cent, much higher than the EU average of 27 per cent. Households in Bulgaria might suffer from negative economic developments. Another problem is that the wealth is concentrated among small groups of people. Household debts are expected to continue growing. More and more non-banking financial institutions will start providing loans, due to the credit restrictions on banks. The investments in traditional bank deposits will continue to decline, at the expense of alternative forms of saving, such as mutual funds, UniCredit says. There is no risk for extreme indebtedness of Bulgarians since the level of borrowed money is low when compared to the average incomes, the report also shows. However, problems might occur for certain individuals because wealth and loans are not distributed equally. In spite of the negative real interest rates in the past few years, deposits have continued to have a dominating position, representing almost two thirds of all financial assets of households. UniCredit also says that the mandatory nature of retirement insurance in private pension funds, the increasing number of insured persons and the hike in the social security contribution by one per cent on an annual basis have helped for the establishment of the pension funds as the second important savings instrument in Bulgaria after banking deposits. The assets managed by mutual funds increased almost twice in 2005. In this way, they have turned into the fastest-growing component of financial assets in the context of the increasingly intensive demand for higher returns and diversification. Insurance reserves also registered a significant growth, UniCredit says. According to the group experts, this was mostly a reflection of the growth in the volume of loans for the population, where insurance is sold as a mandatory accompanying product. New Europe households had lower income, wealth and debt in 2005 than Old European ones, but similar home ownership ratios (even if quality is different), UniCredit’s report also showed. The retail lending market in the region shows a similar development pattern - with growth driven by the mortgage market - compared to the eurozone countries, although New Europe starts from a much lower base. Fast credit growth comes in the context of households’ desired fast convergence to the EU standard of living, favourable macroeconomic conditions, improved access to credit markets and better supply conditions. New Europe households are still relatively less indebted as compared to the eurozone in terms of income. However, the accelerated credit growth and exposure in foreign exchange could be a source of vulnerability. At the macro level, the current account deficit is part of the transition story. Although wide external gaps can be a threat for external sustainability, UniCredit finds that on top of the households and the public sector, the corporate sector is playing even a stronger role in its determination. On the overall, the group believes that households’ credit growth is an equilibrium phenomenon. In order to guarantee its long-term (and overall macroeconomic) sustainability, credit quality monitoring and prudent macro policies (particularly on the fiscal side) are crucial, UniCredit says. http://www.sofiaecho.com/(10.04.2006)