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Bulgarian banks stabilized with aid after 'criminal attack' to bring them down with rumours

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SOFIA, Bulgaria - Bulgaria sought to stabilize its banks with rescue money on Monday after what the government called a criminal plot to undermine them with rumours triggered runs on deposits.

Police arrested five people on Sunday for allegedly using text messages, emails and phone calls "to spread false information that caused detriment to commercial banks and destabilized the banking system." Two of them were charged on Monday and could face two years of prison.

The rumours of liquidity shortfalls had caused widespread concern and two banks were hit by runs on deposits in recent days despite authorities' insistence there was no reason to worry. The government decided this weekend to offer a 3.3 billion-leva ($2.25 billion) emergency credit line to the banks to stabilize them.

Shares in the banks soared Monday after the European Commission, the EU executive, cleared the move.

President Rosen Plevneliev, who convened party leaders at an emergency meeting on Sunday, said "there is no banking crisis but a crisis in confidence and criminal attacks."

"We have sufficient reserves, means and tools to deal with any attempt at destabilization, and we stand behind each bank that becomes the target of an attack," he said.

On Friday, First Investment Bank, the country's third-largest bank, was hit by a run, just days after the fourth-largest lender, Corpbank, had been put under special central bank supervision after itself suffering a run.

Some Bulgarians continued to withdraw money from First Investment Bank on Monday. But the queues were smaller than on Friday, when the bank had to close early because of the rush to withdraw deposits.

Prosecutors on Monday charged Kiril Dzhabarov and Robert Dimitrov with "spreading false alarming information." The crime carries a sentence of two years of imprisonment. It was not immediately clear whether the three others were cleared of wrongdoing.

The EU Commission, the 28-nation bloc's executive, said that beyond the rumours-induced jitters, "the Bulgarian banking system is well capitalized."

Analysts agree. Georgi Ganev, an economist with the Center for Liberal Strategies, an independent think-tank , said the banking systems does not face financial problems of the kind that would warrant a run. This case of jitters was caused by a specific and concerted attempt to destabilize the banks, he said.

With confidence in the banks mostly restored thanks to the rescue money, economists expect there to be no lasting damage to the country.

Plevneliev said the country's currency will continue to remain pegged against the euro despite the volatility in the financial system.

In 1997, Bulgaria's currency, the lev, was pegged at a fixed rate to the euro under a currency board arrangement, which imposed strict financial rules aimed at restoring fiscal discipline, preventing deficit spending and controlling inflation.

Bulgaria, the European Union's poorest member country, has maintained financial stability since the 1996-1997 financial crisis that led to hyperinflation and the collapse most of the country's commercial banks.

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