Serbian resolve to resist IMF demands stiffens

By bne IntelliNews July 3, 2013

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With a start date for EU accession in the bag, and global debt markets regaining a little of their recently lost confidence, Serbia turned more bullish on July 2, insisting that failure to secure a new IMF agreement will not be "a tragedy". Belgrade soon got its wrists slapped however, as it struggled to shift a new debt issue.

Following a government meeting on July 2, Economy and Finance Minister Aleksandar Vucic cast fresh doubt on Belgrade's willingness to push to meet the demands of the International Monetary Fund to secure a new loan, as investors have been hoping. Insisting the revised 2013 budget will be planned for Serb citizens, the powerful official insisted it would "not be a tragedy" should a fresh bailout not be agreed.

Prime Minister Ivica Dacic echoed his stance. "We are not here because of others, but because of our citizens," the PM said, according to B92. "The state did not go bankrupt even when it was at war, and it certainly will not go bankrupt now." He added that the current plan to freeze salaries and pensions is "more about wanting to meet the IMF and World Bank's expectations."

Discussion over the budget is due to resume on July 4, with Vucic apparently in the driving seat. He told reporters that the IMF demands would be very difficult to meet, adding in a halfhearted manner that Belgrade will continue talks to "try" to reach a deal.

The PM tried to insist that there are "no disagreements within the coalition, just different perspectives," but as Tim Ash at Standard Bank notes: "Vucic is the power behind the ruling coalition in Serbia, heading the nationalist Serbian Progressive Party (SNS) which is currently topping the polls. So one has to assume that what Vucic says, goes."

Market nerves over the issue were reflected during an auction of domestic bonds which took place at the same time as the government meeting. Belgrade raised RSD3.3bn ($38m) of two-year debt, which was just 33.7% of the RSD10bn offered, reports Reuters. Serbia was forced to sell the issue at a yield of 10.48% - significantly above the 9.89% it achieved at a previous auction of two-year bills in May, the finance ministry's debt agency said in a statement.

"Last week, when markets were selling off/closing to issuers like Serbia, it looked much more likely that a new IMF deal would be "cooked" up by the autumn," suggests Ash. "Now with markets appearing a little more benign, if somewhat more expensive for the likes of Serbia, the Serbs clearly prefer to go it alone."

However, the failure to place a larger portion of the debt could yet make Belgrade think twice. It struggled with bond sales through June as the US Fed's hints of a pullback on quantitative easing hit emerging market debt hard. A warning from the IMF to the government to cut spending or risk the deficit increasing to above 8% of GDP this year also hurt sentiment.

On June 19 it managed to sell around about two thirds of a planned €50m issue of three-year notes, while one week later it managed to shift less than 20% of a RSD10bn offer. The draft budget revision raises the deficit to 4.7% from an original 3.6% and envisions savings of RSD36bn in cuts in administration and subsidies for loss-making state-run firms. It however allows a 0.5% rise for public sector wages and pensions. However, the fiscal council said on July 1 that the budget gap could rise as high as 6% of GDP.

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