Serbia borrows $34.9 from World Bank

Serbia got another loan, this time from the World Bank to fill up budgetary gaps caused by decrease in tax revenue caused by the economic slump.

The $34.9 million loan is amortized over 20 years, with an 8 years grace period (no payments needed) and the annual interest is the average of the six-month LIBOR rate.

Serb finance Minister Diana Dragutinovic said that the money will go straight into government account to fill up the hole in spending.

She said that the World Bank agreed in 2007 to aid Serbia and, she says, this is the first in such package.

The World Bank will approve at least one more loan to Serbia this year but did not specify the size.

World Bank’s Simon Gray, who signed the loan, said that Serbia deserves help because it already conducted successful reforms that streamlined the procedure for corporate registration, that it privatized its energy sector and insurance and is working on streamlining real estate licensing.

The World Bank loan comes hours after Serbia’s Foreign Minister got assurances from Austria that Austrian banks, hit hard by loan losses, will remain in Serbia and will not take flight with its capital.

Serbia was worried that Austrian banks may transfer some of the capital out of Serbia in order to help recapitalize the parent bank against loan losses.

On March 27, Serbia and the Austria agreed that the banks will remain in Serbia and have signed a memorandum of understanding that calls for stress testing of the Serbian banking, and for the IMF support of Serbian Central Bank that will provide support for the banks in possible danger.

“We are aware that it is in our own collective interest and in the interest of Serbia for all of us to subscribe to coordinated commitments to maintain our overall exposure to Serbia,” the agreement says but it obligates Serbian Central bank to perform bank stress tests and to fill in the holes “within the framework of the multilateral support programs, on bilateral basis with the NBS”.

Translation: The banks want Serbia’s central bank to provide them with help by borrowing from IMF.

Serbia’s escalation of debt should not set of any alarms yet because, as of the end of January, Serbian total external debt is $27.7 billion or 55% of country’s Gross National Product. Of that total debt only 8.5% is in short term loans which can cause crisis of payments and a run on the currency.

Growth of Serbia's external debt

However, of the $25.4 billion that is short and medium term debt $16.8 or 66% is owed by private enterprises so any inability of the private enterprise to service such a large stock of private debt can lead to massive collapse in the economy.

In a sign of a rapid financial deterioration of Serbia’s private enterprise, the government has already asked IMF to “reprogram” some $7 billion of the enterprise loans, a code word for inability of private enterprise to pay its debts.

This is why Serbia’s private business has warned of an economic tsunami that will wipe out half the economy.