SOFIA (Reuters) - Little over a year after joining the rich boys' club, European Union newcomer Bulgaria has seen its reputation hit a low, marred by its failure to tame chronic graft and crime.
Some investors say the situation in the Balkan country has become worse than in neighboring Romania, ranked the most corrupt EU nation by Transparency International. Investing in Bulgaria without paying bribes or encountering the mafia is almost impossible, they say.
Economists say corruption is damaging Bulgaria's investment image and competitiveness.
"It hasn't prevented investment but clearly it is a concern," said Jon Levy, an analyst at Eurasia Group.
"It probably makes Bulgaria less competitive in comparison even to some other destinations in eastern Europe," he said.
With the incentive of EU membership gone, Sofia and Bucharest have succumbed to reform fatigue. Their anti-corruption efforts are also stymied by hesitant policy-makers, political feuds and inefficient state administration.
Skeptical EU members question the decision to let the two nations join the bloc so early and are pushing Brussels to impose sanctions against Sofia, whose list of misdeeds is mounting: More than 150 unsolved high-profile contract killings this decade; suspected fraud with EU funds and police officers passing secrets to drug traffickers; failure to charge a single high-level official with corruption.
Even U.S. Democratic presidential candidate Barack Obama has said any failure to address graft and organized crime could jeopardize Bulgaria's future cooperation with the EU.
Morale at home is low.
Bulgarians say they have lost faith that the EU's poorest country of 7.6 million people can put corrupt officials and crime bosses behind bars any time soon.
"I have the feeling we live in a lawless country," said Maria Georgieva, a retired teacher. "I no longer trust a single politician, their only goal is to enrich themselves."
Opinion polls show corruption has exceeded low incomes as people's biggest problem and a World Bank survey said 46 percent of companies considered graft the largest hurdle.
"There is a problem with the political elite in this country. New, clean faces are needed," said Rumiana Bachvarova, political analyst with polling agency Market Links.
Sofia boasts it has attracted some 6 billion euros ($9.3 billion) in foreign investment annually in the past two years but economists say the quality and composition of the investment is worrying.
Last year, nearly half went into construction and real estate, which according to surveys have become the top markets for organized crime and money laundering.
A number of foreigners who have businesses in Bulgaria won't risk speaking openly against corruption, pointing to the experience of Canada's Dundee Precious Metals, which launched an international campaign against high-level graft and was made to wait years for licenses.
"Corruption is everywhere. Everybody knows that but nobody is reacting," said one investor, speaking on condition of anonymity. "If this goes on, I'd better pack and go somewhere else -- Romania for instance."
Bulgaria has partly reformed its justice system but has failed to make judges accountable. It has created anti-corruption institutions but has done little to alter a climate of impunity.
Diplomats and analysts say the root of the problem lies in links between politicians and magistrates and criminal groups, some of which sprang from the former Soviet secret services.
That makes graft a more challenging issue in Bulgaria, even though it ranks below Romania in Transparency International's 2007 survey of 180 countries.
"organized crime and corruption have intertwined with the state here," said one diplomat. "In Romania they seem to be separate issues which makes it a bit easier to tackle."
Problems with graft and the judiciary in the Balkan countries were obvious before they joined the EU in January last year. But both were promised entry in 2007 and Brussels concluded delaying membership might slow reforms further.
Russia's increasing economic influence in the Balkans was another reason to cement their ties with the EU sooner.
Some commentators say only continued strong pressure from Brussels combined with a "carrot and stick" approach can make Sofia clean up its act.
The threat of losing some of the 11 billion euros the country has been promised in EU aid has prompted Socialist Prime Minister Sergei Stanishev to sack several cabinet ministers and appoint a vice premier to oversee all EU funds to clean up the government's image.
The western-educated Stanishev, 42, who represents the young generation of the former communist party, has also pledged deep police reforms and measures to raise living standards ahead of an EU report in July which will assess Bulgaria's progress.
But the premier will be hard-pressed to bring about real change, as he grapples with conflicting interests and power struggles in the three-party ruling coalition, whose mandate expires next year.
Many Bulgarians say the country needs a "strong hand" and point to Sofia's maverick mayor, Boiko Borisov. Polls show his opposition rightist GERB party would be the winner if elections were held today as support for the Socialists plummets.
Borisov, the 48-year-old former bodyguard of ex-king Simeon Saxe-Coburg and late Communist dictator Todor Zhivkov, won over Bulgarians with down-to-earth language and an anti-crime campaign as interior ministry secretary in the previous government.
Borisov is also alleged to have past links to the country's underworld. He denies these.
Editing by Janet Lawrence and Sara Ledwith