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Tuesday, January 30, 2007

Private Debt In Serbia

OK, I'm back after a short posting hiatus while we were getting Global Economy Matters up and running.

Reading through the press this morning I couldn't help being struck by this piece on Serbia:

In its "Serbian Financial Report" Research and Markets says that it agrees with IMF that strong credit growth in Serbia has started eroding financial stability.

The Fund underlined the high level of euroization and the fact that almost all credits extended are in EUR, which exposes borrowers (and thus indirectly the lenders) to considerable foreign exchange risks.

What we seem to have looming in some parts of Eastern Europe is the return of what Krugman used to call "balance sheet consequences" which could follow the rapid downward unwinding of a currency, but in this case based on the level of private, rather than public or corporate, debt. Nonetheless the impact of such an eventuality on domestic consumption would be significant were it to occur.

Oh, and don't miss this:

At the start of August, the National Bank of Serbia (NBS) announced changes in its monetary policy, which include the start of inflation targeting.

The target of the central bank will be core inflation (covering some 55% of all prices) with its first objectives being 7- 9% y/y inflation at the end of 2006 and 4-8% y/y at the end of 2007.

In line with the new policy, NBS also decided to change the instruments for achieving its monetary objectives. Its main policy instrument in the future will be the 2-week repo interest rate, which will be determined by the Monetary Council at its regular sittings. Up until now, the central bank used mostly the mandatory reserve requirement ratio to conduct its monetary policy.

The key policy rate is currently set at 18% and is used for determination of the other basic interest rates used by the central bank.

Well with inflation running at over 10% and policy rates at 18%, it isn't hard to see the attraction of euro denominated debt, but the currency risk has to be huge, since it is hard to see real and sustained economic growth with this level of interest rates. And of course Serbia still doesn't have a government, while the Kosovo wild-card looms large:

The president began consultations Monday on forming a new government in Serbia, a process complicated by a U.N. envoy's presentation of a plan for the breakaway province of Kosovo.....

A compromise among Serbia's political groups could take weeks or months, and is complicated by the upcoming release of a U.N. report on resolving Kosovo's disputed status.

U.N. special envoy Martti Ahtisaari plans to visit Belgrade on Friday to present his proposal to Serb leaders. He then will present the plan to ethnic Albanian leaders in Kosovo's provincial capital, Pristina.

"We never said we were going to wait for a new government" to be formed in Serbia, Ahtisaari spokesman Remi Dourlot said.

Kostunica has insisted the Kosovo talks should wait until a new Serbian government is in place. Saying that, as caretaker premier, he has no mandate to discuss Kosovo's future, Kostunica has vowed not to attend the meetings with the envoy.

His conservative Popular Coalition denounced Ahtisaari's decision to visit Belgrade before a new government was formed. "This seems like Serbia is treated like a colony which will do anything it is told," spokesman Andreja Mladenovic said. "We cannot communicate in such a way."

So why all the interest in what many would consider to be small and rather minor countries like Serbia and Hungary? Well really the Eastern Europe correspondent over at The Economist, Edward Lucas summed it all up in his latest Europe.View column:

’Forget, for a moment, the headline stories from central and eastern Europe―the pipeline politics, the corruption scandals, the treasonous tycoons. The big story in the ex-communist world is people. Too few are being born. Too many are dying. And tens of millions have changed country.’

And this process at the end of the day is going to be extremely de-stabilising, and have important macro economic consequences which reach far beyond the frontiers of the countries concerned, as Claus Vistesen tries to explain here.

I have, btw, posted a more substantial piece on the Serbian economy on GEM.

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