Serbia: maximum debt to cure borrowing defaults

Last week, Serbia’s economist Stojan Stamenkovic warned that Serbia faces bankruptcy.

“Serbia needs to do everything so it can maintain its foreign currency liquidity because without that there is a threat like in 1980 when the country went bankrupt,” Stamenkovic told Serbia’s daily Politika.

Yesterday, Serbian Minister for Economy, Mladjan Dinkic, told Belgrade daily Vecernje Novosti that Serbia will not go bankrupt.

“Some countries have in this crisis, bankrupted, like Iceland, Letonia, Hungary is on the edge of collapse. We will for sure escape that,” said Dinkic.

Then again, Dinkic is the guy who, on several occasions in the past, said that, despite the global recession, Serbia will not see its economy shrink.

Serbia’s industrial production takes a dive

Today, the IMF told Serbia to expect its economy to shrink by 2% in 2009 and asked the government to freeze the wages and pensions for next 18 months if it wants IMF help to “reprogram”, euphemism for can no longer pay, about $7 billion of private debt obligations.

As of January 31, 2009 Serbia has $27.7 billion in total external debt of which some $19 billion is borrowed by private firms so the $7 billion it seeks to “reprogram” represents a rather astounding debt default rate of 37%.

Not surpassingly, from South America to Europe, politicians like Dinkic publicly claim that the government is on top of it.

“There is an intentional policy of setting positive expectations. I don’t think the government itself believes its numbers,” says Ilan Goldfajn, an economics professor at Rio’s Pontificia Universidade Católica, about the Brazilian government that, like Dinkic, belittled this financial crisis by calling it a “ripple”.

In fact, Dinkic reassured the public that the Serbian government is in the absolute agreement on how to handle the crisis, so if we are to properly understand what Goldfajn is saying, that means that Serbia will put a lipstick on the pig at every point it grows into a larger of a disaster.

“We are cutting the spending, we are pumping in liquidity in the economy, especially the private sector, because it employs 1.6 million people that feed the 550,000 that work for the government,” said Dinkic.

So why hasn’t the government spending been cut in the past when times were good? Why is the government allowing 1.6 million employed in the private enterprise to subsidize 550,000 government employees?

The politics in an economy whose population is shrinking like Serbia’s has a tendency to seek to inflate the living standard now at the expense of labor productivity which determines the wage in the long run. Hence we see, for example, that wages in Serbia increased in February by 6.4% from the previous month in real terms while the Statistical Office does not even tabulate country’s total labor productivity.

One way to inflate the living standard is by excessive borrowing, and like many other countries, Serbia hopes to get out of its deflating debt by borrowing to the maximum.