More money spent to save the Dinar

In the past few days, Serb central bank has spent 50 million Euros buying up its own currency amid reports that there is a great deal of demand for foreign currency.

An economist Goran Nikolic tells Serbian daily Glas Javnosti that the 50 million spent is a dramatic action and says that there is a large demand for foreign currency. He did not specify who wants out of Dinar but said that bankers in Serbia are expecting the inflow of foreign capital to slow, so just like their banking kin in the West, the bankers in Serbia maybe the first to move and hoard foreign denominated cash.

Further, with private, non government debt at $20 billion and payments for it coming due, there is a likelihood that these private firms may soon themselves move to convert their Dinar holdings into foreign currency. As the financial contagion spreads across the world, these firms may realize that moving in first to convert has the advantage because being last means no money can be converted and that will force them to default on their debt. While the decision to move first may be rational, it is often a trigger for a run on the currency.

Serbian chief central banker, Radovan Jelasic, went public in number of venues to reassure soundness of the financial system and expressed his resolve to defend the Serbian currency. Jelasic told the public today that savings in Serbian banks are safe by citing that 45% of foreign currency deposits are with the central bank and that the banks are well capitalized up to one third.

Jelasic tells Belgrade daily Vecernje Novosti that savings accounts denominated in foreign currency are near 6 billion Euros of which 30% can be withdrawn at any time, while deposits of up to one year account for 27% of that.

According to these figures then, if there was a run on foreign denominated savings deposits central bank will immediately lose about 1.8 billion Euros or $2.43 billion (the 30%).

This translates into a depletion of official reserves down to $7.1 billion and that moves the debt-to-reserve ratio to the really alarming level of 52%.

An ordinary, conventional mortgage on a house in the US requires that this ratio must not exceed 37.5%.

These 3 sources as a possible trigger for a run on the currency whose effect is ballooning the debt-to-reserve ratio will cause a serious downgrade in creditworthiness of Serbia by the credit rating agencies such as the Moody’s. Such downgrade is followed by some serious consequences to the ability of the government to borrow.

Meanwhile, capital flight is collapsing the Belgrade stock exchange which has gone below 1000 from the height of 3000. The bourse is planning to introduce curbs on trading by limiting the bid-ask spreads to within 20%. Trading curbs are in effect in the US and the drastic collapse of the US Dow Jones during that time suggests that the curbs may do more damage then good.

One the bright spot in these negative news is the capitalization of the banks that operate in the Serbian market. According to Nikolic, the ratio of capital to exposure to risk is 3 times higher in Serbia then in rest of the Europe, and perhaps this conservatism in lending, may be the magic bullet that dissuades depositors from a run on their deposits.