Serb c.bank chief defends banking system

On Friday, Serbian central bank governor Radovan Jelasic held another presentation on the effects of the global financial crisis on Serbian banking and he used the opportunity to admonish reporters for stirring up panic that is costing the economy.

“Inaccurate and incomplete reporting on global financial market developments,” says Jelasic has caused “belittling of facts on the Serbian banking sector” and in particular of capital adequacy, liquidity, foreign reserves that is costing “unfounded and artificial tensions” and costing 100 million Euros that has been pulled out of the system that could have been used to make loans to the public.

By requiring banks to hold in cash 40% of foreign currency deposits, Jelasic stressed that Serbia’s banking system has one of the most stringent requirements on foreign currency savings, and that makes those bank deposits very safe.

He also pointed that bank capitalization in Serbia is 28% of deposits.

Jelasic said that cheap loans are gone for good from Serbia but loans denominated in local currency are divorced from the global financial markets because they depend on inflation which he seeks to fight.

In earlier presentation, Jelasic also noted that financial contagion from abroad is limited on Serbian banking sector because “banks in Serbia are daughter banks, i.e. separate legal entities with own capital, under NBS supervision”.

The governor also pointed out that Serbia’s central bank reserves are held in ultra safe instruments.

Of 9.72 billion Euros that make up the reserves, 6.69 billion are in securities, 2.33 billion in deposits of which 2/3 is in vaults of other central banks and the rest as AAA or AA quality foreign bank paper.

Jelasic noted that, according to the Article 3 of the mandate, central bank is in charge of a price stability, financial stability and support of the government’s economic policy.

Governor is in favor of a stand-by arrangement with the IMF. A stand-by loan is when the money to be borrowed is approved but not necessarily used. Such stand-by would alleviate pressure on Serbia and enhance its credit rating, claims the governor.

The negotiations of such loan will start on October 26 and it will be available next year. IMF will likely demand drastic cuts in government spending.

Analysts believe that the governor has won a short term victory for Serbian financial stability but the longer term trend of declining foreign investment inflow does not bode well for the financial stability.

Foreign direct investments have already declined this year so the remaining source of inflows is from privatization of state owned firms. IMF is critical of handling of the privatization.

Serbia owes $29 billion to international lenders which represents about 13% of the GDP. Private sector borrowing accounts for additional $20 billion of debt of which only $2 billion is short-term debt that is often seen as the trigger of currency crisis.