Clare Nuttall in Bucharest -

Bulgaria’s coalition government announced its resignation on July 23, as widely expected ahead of snap elections scheduled for October. The next government will have its hands full as it inherits geopolitical hot potatoes, a bank sector on the verge of crisis and a desperate need to revive economic growth and investment. 

With parliament expected to approve the move in a vote on July 24, Prime Minister Plamen Oresharski and his cabinet steps down after just over a year in office. Their resignation will pave the way for a caretaker government in advance of the early elections. 

As Bulgarian Socialist Party (BSP) head, Oresharski came to power following the fall of the previous administration led by the centre-right Citizens for European Development of Bulgaria (GERB). Then PM Boiko Borisov and his cabinet were forced to resign following mass street protests over falling living standards and a series of corruption scandals. 

However, Oresharski's rule has been mired in scandal from the outset. His appointment of controversial media tycoon Delyan Peevski as head of the state security agency, triggered a new wave of protests almost as soon as he entered office in late May 2013.

While his government has pushed through some reform - such as an increase in the minimum wage - the scandals have prevented it taking decisive action to revive flagging economic growth and attract investment. During the past 12 months or so, the government has faced no less than five no-confidence votes. 

Final straw

The final straw was BSP's terrible showing in the European Parliament elections in May this year. GERB took 30.4% of votes – almost twice as much as Oresharski's party. In wake of that disaster, the BSP's junior coalition partners - the Turkish Movement for Rights and Freedoms (DPS) and the nationalist Ataka party - joined GERB in calls for the government to quit.

Growing divisions within Bulgaria over Russia's South Stream gas pipeline project, and the resultant rift with Brussels, contributed most to the demise of the government. The pipeline, which will bypass Ukrainian routes to ship gas from Russia to central and southeast Europe was made a priority project by Oresharski. However, the EU has stiffened its opposition as relations with Moscow have deteriorated. 

That left Sofia in the middle. Oresharski announced the suspension of construction on the Bulgarian section of the pipeline until agreement could be reached with Brussels on June 8. However, the government has continued to push the EU to relax its stance, even as Brussels gathers itself to stiffen sanctions against Russia. 

Oresharski's government came in for further criticism over its selection of a consortium led by Stroytransgaz – a Russian company owned by Gennady Timchenko's Volga Group and one of the targets of US sanctions – to build the Bulgarian section. On top of that, opposition leaders claim the €3.5bn project cost is inflated, while the EU launched an infringement procedures citing a lack of transparency in the tender process.

Inheritance

In the final days of the current government, the Bulgarian press reported that state-owned Bulgarian Energy Holding was preparing to make a decision on €620m loan from Gazprom to finance the Bulgarian stretch of the pipeline. President Rosen Plevneliev stirred the pot on July 22 by stating that all activities related to South Stream should be put on hold pending an agreement with the EU.

Meanwhile, Bulgaria is still scrambling to avert a banking crisis. Speculation of corruption triggered a run on Bulgaria’s fourth largest bank Corporate Commercial Bank (CCB) in June. The bank was taken under the Bulgarian National Bank’s (BNB) supervision, with swift state action required to prevent a bank run at another major lender days later. 

However, the BNB failed to secure political support for a bailout plan in mid-July, and has extended its administration. In particular, it struggled with a suggestion that large deposits be included in the state guarantee scheme. That failure threatens to extend the crisis across the sector.

Another hot potato for the next government is the signing of a contract to build a new unit at the Kozloduy nuclear power plant. Deputy Prime Minister Daniela Bobeva told a press conference on July 23 that the government's successor will now need to make the big calls. For the long-delayed project to proceed the next administration would need to confirm support for the project before signing an agreement. US-based Westinghouse Electric is thought to lead the competition to build the €3.6bn reactor. 

Uncertainty

At the same time, the long-term political uncertainty has done little to help lift economic pressures that have had protestors out on the streets over pensions, jobs and utility bills for months on end. The International Monetary Fund (IMF) forecasts a "modest pick-up" in growth this year, however, it also warns that erratic politics poses a risk to faster growth. In the first five months of the year, foreign direct investment (FDI) dropped 33.8% compared with the same period of 2013. The BNB reports FDI dwindled to just €8.6m in May, compared with €151.8m the previous year.

It is unclear whether the election will result in a stable government for Bulgaria or another shaky coalition. GERB is the largest party in the current parliament, but a repeat of its 30.4% performance at the European elections in October would be insufficient to allow it to form a majority. The BSP, DPS and the Bulgaria Without Censorship, which made a strong showing in the European elections just four months after its launch in January, are others likely to take seats.

Meanwhile, there are also no clear indications on who will be selected to make up the caretaker government, which Plevneliev is expected to appoint in early August. However, speaking during a visit to Plovdiv on July 21, the president said the caretaker cabinet would be filled with “Democrats, pro-Europeans and experts,” and will be tasked with resolving problems in the energy sector and with Bulgaria’s access to EU funds, Standart News reported.