A false rumor can be all it takes. Photographer: NIKOLAY DOYCHINOV/AFP
A false rumor can be all it takes. Photographer: NIKOLAY DOYCHINOV/AFP

(Corrects the role and timing of the bulletin, and share of emergency funding in the government's credit line to banks, in second and fifth paragraphs.)

Bulgarians say the way to kill a bank is the same as for a fly: with a newspaper. Nowadays that needs to be updated, because bank runs start with e-mails and Facebook messages, even when a controversial media magnate is allegedly involved.

The country's third and fourth biggest banks, Corporate Commercial Bank AD (Corpbank), and First Investment Bank AD (Fibank), suffered massive runs last week as clients lined up to withdraw cash. The former had to close and submit to temporary management by the country's central bank. This was caused by a slew of unsolicited emails, Facebook and text messages warning of the dangers of keeping money in certain banks. Bulgaria's National Security Agency provided one example of such a missive, sent out by an investment company that "built a network of associated companies for marketing services" and used them to destroy confidence in the banks.

The flash banking crisis in the European Union's poorest, most corrupt country shows how easy it is to destabilize the economy in an uncertain political situation. It suggests, too, that the EU has expanded into a world that doesn't live by the bloc's rules and values.

The investment company in the National Security Agency's example allegedly used its marketing network on June 26 and 27 to send out a bulletin called: "Information Bulletin on the Risk of Deposits in Bulgarian Banks." The unsigned and sometimes ungrammatical document alleged that Corpbank, controlled by influential businessman Tsvetan Vasilev, was undergoing a liquidity crisis. It also said the government's deposit guarantee fund did not have the capital to carry out its functions; that further bankruptcies were possible; and there was a chance the national currency would be unpegged from the euro and devalued.

Because of similar previous rumor attacks, Corpbank had, by June 20, lost deposits amounting to more than 20 percent of its assets. The central bank had to take over Corpbank's management, even though the bank was fundamentally sound. Next, Fibank was driven to the brink of ruin. The Bulgarian government had to raise $909 million through an emergency bond issue, mostly from foreign-owned banks (a subsidiary of Italy's UniCredit SpA is the country's biggest bank), as part of a $2.3 billion credit line meant to stop the run and stabilize the situation.

There were no fundamental reasons for the bank run, except perhaps for a clash of two oligarchs, Vasilev and Delyan Peevski, one of the most flamboyant and unpopular business figures in Bulgaria. Peevski is only 33, but he has built up a media conglomerate including some of the country's biggest newspapers and websites, until recently held in the name of his mother and now improbably owned by a company recently registered to the name of an Irish citizen, one Patrick Halpenny.

Last year, Socialist Prime Minister Plamen Oresharski appointed Peevski to head the National Security Agency, but had to fire him almost immediately after the decision triggered street protests.

Peevski and Vasilev have clashed over control of Bulgartabac, the company that runs Bulgaria's tobacco industry, and the Russian gas pipeline project, South Stream, whose success hinges on Bulgaria building its part of the pipe. Peevski muscled into the project to become a partner of the Russian contractors. Vasilev has said the government tender involved should be rerun. Recently, the two oligarchs exchanged (unevidenced) murder accusations.

Vasilev denies Peevski is behind the run on his bank, saying his rival was "being used as a tool in a larger scenario aimed at destabilizing the country," presumably a reference to Russia. Be that as it may, a clash between two businessmen, no matter how politically connected, could not have led to such grave consequences in any "old" EU member country. Only in Bulgaria, where the president has just called for an emergency election in October, could a dodgy "bulletin" set off a bank run. People are so uncertain of the future and of politicians' ability to govern rather than line their pockets -- Peevski is a parliament deputy, representing a party within the current ruling coalition -- that they will believe anything and do what they can to keep their savings safe.

After seven years of EU membership, Bulgaria is still an unstable, oligarch-infested, corruption-ridden country susceptible to pressure from Russia, on which Bulgaria depends for its natural gas supplies. The EU can do little to fix the mismanagement of the country, any more than it can fix the near-dictatorship in Hungary. The newer members countries are only as European as their elites want to be and it is through these elites that Russian President Vladimir Putin makes inroads into Europe, ensuring the EU doesn't make a united stand against his expansionism.

To contact the author of this article: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this article: Marc Champion at mchampion7@bloomberg.net.