Is Serbia setting up for a run on its currency?

States and countries have became the latest victims of the financial hemorrhaging that is sweeping the globe.

Over the weekend the debt laden California is seeking emergency loans from Washington in order to avoid bankruptcy while Iceland is doing the same kind of begging from their neighbors to rescue them from reckless lending their banks did.

Bankers are suddenly alarmed that Pakistan may default on its debt as its debt-to-reserve ratio rose from 30% to 32%.

Turkey’s debt-to-reserve ratio of 31% is already alarming the IMF and may table that country at this week’s IMF/World Bank meeting in the US.

If what is happening to these countries is any suggestive what may await the debt strapped “developing” Serbia, the picture, at least for next several weeks, may look very alarming.

Serbia’s public debt obligations of $3.7 billion are a whopping 39% of its foreign reserves of $9.5 billion that the Central Bank has in the vault.

The larger the ratio the less money country has come bill payment time.

In addition, Serbia’s private debt is over $20 billion and to pay their payments, private firms will soon seek to convert their domestic Dinars from the Central Bank and deplete the savings even more.

The way to reduce this percent and have more money for paying bills, is for Serbia to export more, or attract more foreign investment or borrow on more favorable terms to pay its bills.

Serbia is paying only lip service to exports, globe trots for the diminishing pool of investment money and is running out of favorable borrowing terms.

IMFs recent report on its visit to Serbia assesses that “exports are not keeping up with surging imports” and has already warned of Serbia’s “unsustainable external current account deficit.”

The word “unsustainable” is often a code word to speculators that country’s currency may soon take a hit.

This outflow of reserves, says IMF, is offset by “abundant capital inflows [that] have, at least until now, largely defused macroeconomic tensions.”

But what about after now?

With borrowing terms now reduced to only 24 hours at a time, it will be a long time when banks will become willing to borrow long so that a country may pay off its short funding demands.

IMFs optimistic prognosis that Serbia’s “real GDP to continue to expand at a robust 6-7 percent during 2008-09″ is then predicated more on hopes then reality that foreign investors will have enough money in the future to pump into Serbia’s economy and keep its local currency propped up.

So, we have a 1-2-3 knock out set up on the currency – unsustainable trade deficit, prospect of diminishing foreign investment inflow and tight borrowing terms – all a culmination of an 8 year old borrow-and-spend policy.