M. Bozinovich

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.

Economics Economy

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.

Economics Economy