10 years of success - now the real challenge begins Lars Christensen Senior Analyst, Head of New Europe Research + 45 33 44 05 45 (direct) + 45 40 74 49 51 (mobile) larch@danskebank.dk Danske Research, Danske Bank www.danskebank.com/danskeresearch Sofia, September 18 2007

A real success – the numbers speak for themselves (I)

A real success – the numbers speak for themselves (II)

The success is unquestionable but is it a permanent solution? There are two schools of thought: The Hanke-Schuler position: The CBA is a permanent solution The Friedman-position The CBA is one many possible ways to monetary stability The CBA is a “tool” to bring down inflation and “import” credibility in monetary policy (this has been a highly successful strategy in the case of Bulgaria)

Some reasons for concern While Bulgaria’s currency board has brought inflation down and brought stability some developments give reason for concern: Inflation has consistently been too high (average of 6.3% since 2000) External imbalances have grown to unsustainable levels Credit and money supply growth is too strong to be non-inflationary Asset markets show signs of bubbles

Inflationary currency boards? Bulgaria Latvia Hungary Estonia Lithuania Romania Czech Republic Slovakia Current account deficit (% of GDP) Poland

Next step – continue the right policy What is the next step for monetary policy in Bulgaria? The CBA has in general been a success so there is no reason to change track now But the CBA needs to be balanced by tight fiscal policies and continued structural reforms Efforts to slow credit growth and reduce imbalances in the economy most be stepped up CBA is a temporary solution and hence effort to join the euro should be kept on track

Thank you for you time and CONGRATULATIONS

This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.