Now Serbia Adds Its Name To Those In The IMF Sick Ward

Serbia has also decided to ask the International Monetary Fund for additional support, according to a stament from senior government officials last Monday cited in Reuters.

“We are certainly not in a group of emergency cases, such as Hungary,” a senior official who asked not to be named told Reuters. “But we need the agreement for longer-term stability.”

So, to be clear, Serbia is not an “emergency case”, like Hungary for example – although it should be noted that the Hungarian government are stating that they are not an emergency case like Iceland, who are themselves not an emergency case, like Ukraine, for example, who are in no way to be considered as being in need of support in the way in which, let us say, Latvia is. And Latvia according to Prime Minister Ivars Godmanis is not any kind of case at all, and certainly not one to be compared with Serbia.

Well, make of all that what you will, but one thing is for sure, and that is that experts from the International Monetary Fund are going to have a role in drafting Serbia’s 2009 budget. And how do we know that? Well Serbia’s Prime Minister, Mirko Cvetkovic, told us, today. Strange isn’t it, but still, this hand in the budget drafting process should not be considered to be, bla bla bla.

Meantime Serbia’s currency (the dinar) has fallen 4 percent and the main stock indexes 30 percent in the last 10 days.

Serbia’s case is a little different from most of the others we are seeing since Serbia has only recently terminated an earlier arrangement with the IMF (which lasted from 2002-2005), and what is involved really is agreeing to a renewal of the previous arrangement, a move which the Serbian central bank had already been urging on the government in an attempt to improve Serbia’s credit rating. Since any IMF terms for additional support will likely result in tighter budgetary constraints, this is also to the central bank’s liking, since central bank Governor Radovan Jelasic has been a strong critic of recent government fiscal policy.

Only last month the IMF urged Serbia to aim for a balanced budget in 2009, to restrict public spending, to tame inflation and to cut its current account deficit from the present 18.5 percent of GDP to 10 percent in the medium term.

One local Serbian personality is, however, reported to be working on a formula which he feels might help his country in these difficult times. World Testicle Cooking Festival champion Ljubomir Erovic is apparently seizing the moment to spread his enthusiasm for his favourite food by issuing a new recipe book.

“I wanted to make something that we could be known by…to make a Serbian brand, not to be famous only for bombs, sanctions or corruption,” Erovic said at a friend’s inn in the wooded hills of central Serbia. Erovic’s electronic cookbook subtitled “Cooking with Balls” offers suggestions on how to cook on a grill or stove with various spices such as fresh rosemary, yarrow, thyme and basil, grapes and wine.

Sounds like something out of a Kusturika movie, doesn’t it?

Those of you with the stomach for reading something just a little bit stronger than testicle stew recipes, and with the curiousity to learn why it might be that what we are seeing happening now in Serbia was more or less inevitable, should enjoy reading my Serbia, Must What Goes UP Really Come Down post, written at the time of last November’s elections.

Reuters have also published a very useful fact dossier on Serbia.

POLITICS

* Investor worries about whether Serbia would opt for a nationalist or pro-EU government drove the dinar to its lowest so far this year, at 83.8674/euro, shortly before the May election. * The election of a pro-Western government, followed by the July arrest of former Bosnian Serb President Radovan Karadzic and his handover to the Hague war crimes tribunal, reassured investors of Serbia’s commitment to complete cooperation with the tribunal, the key obstacle to speedier EU accession, sending the dinar to its record high of 75.75/euro.

* The dinar was trading at around 82.3/euro on Oct. 17, down around four percent so far this year, as the global financial crisis heightens investor awareness of emerging market risks.

CURRENCY MANAGEMENT

* Serbia runs a managed float regime for the dinar, also called a “dirty float” where central bank intervention is generally against big daily exchange rate swings.

* The dinar is “semi-convertible” as the government still keeps some capital account restrictions for individuals, but allows Serbian companies to invest abroad.

CURRENT ACCOUNT

* The current account surged in January-August this year to $6.16 billion or 18.5 percent of GDP from 16 percent in 2007.

* Serbia’s 2007 GDP was estimated at $41 billion and was expected to rise to $50.2 billion this year.

* The IMF has advised Serbia to cut the current account deficit to below 10 percent of GDP in the medium term.

* The current account gap is driven by the trade deficit, which hit $7.7 billion in the first eight month of the year.

* Serbia spends most on crude oil and natural gas imports, while its main export revenue comes from steel, sugar, machine parts and car tyres.

FOREIGN DEBT

* Serbia’s foreign debt stood at $29.7 billion at the end of July. Private sector debt accounts for $20.3 billion and the rest is official debt to international creditors.

* Central bank statistics showed banks owed $3.7 billion and other corporates $14.5 billion in medium-to-long term debt. Banks had $1.3 billion in short-term debt and companies $728 million.


FOREX RESERVES

* Official hard currency reserves have been stable and were last reported in September at $13.9 billion. They stood at $14.2 billion at the end of 2007.

* Eighty percent of the reserves are in euro-denominated assets. The bank keeps 24 percent in deposits with other central banks and commercial banks with AAA or AA ratings; 72 percent in foreign securities; and 4 percent in gold, cash and special drawing rights.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

6 thoughts on “Now Serbia Adds Its Name To Those In The IMF Sick Ward

  1. With respect, I think the comments on this blog have greatly overstated Hungary’s reliance on the IMF in the current crisis. In particular, the statement in one headline that Hungary is in IMF receivership is a gross exaggeration.
    Hungary’s leaders decided on the weekend to get an IMF promise of assistance should it be needed. They probably thought that this was a sort of pre-emptive strike that would preclude the need for such aid, by indicating that Hungary would remain solvent come what may. If so, they were inexcusably naïve, as the Prime Minister and Finance Minister should have known that the very mention of the IMF in relation to the national economy would freak the markets out. This is what happened on Wednesday as European markets nosedived again.
    Comparisons with Iceland in particular are far off the mark. As Bloomberg wrote, quoting a London analyst “In Hungary, private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, while short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland.” Far from being overstretched, like Iceland’s, Hungary’s banks are owned by major West European banks who will not let them go under. The largest independent bank, OTP, is unusually well capitalised and probably more solid even than most Western banks.
    Most financial journalists, though, glibly link the two in their broad-perspective stories, an association that thereby enters the minds of investors, who in theory are supposed to know better. Hungary certainly has its problems, more than most, but they are of a different nature to Iceland’s.
    Hungary’s involvement with the IMF, so far, goes no further than a promise of aid, if needed. In securing that promise, the nation’s economic leaders may have made it more likely that they will need such help, precisely the opposite effect to what they intended.

  2. Hello Desmond,

    “With respect, I think the comments on this blog have greatly overstated Hungary’s reliance on the IMF in the current crisis. In particular, the statement in one headline that Hungary is in IMF receivership is a gross exaggeration.”

    Well, I guess that would be me your are talking about. Thank you for your thoughtful contribution, but forgive me if I beg to retain my point of view and differ.

    I don’t agree that I am overstating the very difficult situation now facing the Hungarian economy, although I do agree that the term “receivership” does smack a bit of poetic license (although this is after all a blog).

    I do think Hungary is now in the hands of the IMF, and it could be quite a long day before it is able to come out again. I do believe there is some sort of validity in the use of the receivership term, since I do think there will have to be a default at the end of the day here, but it won’t be a sovereign default, but rather a default by Hungarian households who will no longer be able to pay their Swiss Franc mortgages as the HUF fall to a more sustainable and realistic level.

    Hungary now can only live by exports, and it is stupid, as it was in the case of Argentina, to try to impose a strong currency on a country which needs a rather weaker one.

    As I say, I doubt there will need to be any kind of sovereign default, so it is not a normal kind of bankruptcy. The main victims of the loses incured would appear to be west europen banks like Austria’s Erste Bank, Italy’s Unicredit, or Belgium’s KBC Group all of which have been lending heavily in Swiss Francs.

    If you want more argumentation on all of this, read the mammoth post I will be putting up on Hungary tomorrow morning, or the version of it I already have up on my Hungary Economy Watch blog.

  3. “In Hungary, private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, while short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland.”

    Yes, we absolutely agree on this. In fact I quoted this very point in a piece on my Hungary blog yesterday, a piece which was precisely to argue that Hungary’s long term future looked a lot worse – unfortunately – than Iceland’s (and the post is now up on this blog).

  4. Also, this morning (Friday) in Bloomberg:

    Hungary is drawing up proposals to help borrowers whose foreign currency-denominated loan payments rose as the forint weakened, Prime Minister Ferenc Gyurcsany said. The government is in talks with banks and will present proposals next week that will “significantly ease” the burden of borrowers, Gyurcsany said today in a public television interview. The forint has been battered along with Hungarian stocks and bonds as investors sold off riskier emerging market assets. Foreign currency borrowing by local businesses and consumers, along with slower growth and a wider budget deficit than elsewhere in eastern Europe, make the country a target, economists said.”

    This is the bail-out Hungary will need, a battery of measures to help those with CHF mortgages pay-down their debt, or transfer them over to (subsidised) HUF ones. Hungary, given the fiscal straightjacket she is now in, and the very large costs of population ageing that are now about to hit simply is not able to generate the resources to make this transition alone, and that is why the IMF will have to help.

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