The crisis has doubled the cost of loans for Serbia – Economy

Yesterday, the Republic of Serbia in London issued seven-year eurobonds worth two billion euros with an annual interest rate (coupon) of 3,125 percent and a yield of 3,375 percent.

Just over six months ago, on November 5, 2019, the state reopened the 550 million euro 10-year euro bond issue and received an interest rate of just 1.5 percent and a yield of only 1.25 percent . During March and April, the yield on these secondary market bonds increased to 2.7 percent.

Previous seven-year Eurobonds issued in mid-2018 were at an interest rate of 2.5 percent. This example shows how much a crisis costs.

Money in the international market, although both the United States Federal Reserve and the European Central Bank are pumping money tirelessly, is twice as expensive for countries like Serbia than before the pandemic.

As indicated in the announcement by the Serbian National Bank, at the start of the auction, investors asked for half a percent more, but demand, which reached seven billion euros, reduced the yield to 3,375 percent.

“Serbia is the only country in Europe that entered the international capital market during the Kovid-19 virus pandemic, without the help of the European Central Bank to place securities,” states the NBS.

Nikola Altiparmakov, member of the Fiscal Council, points out that, in principle, this can be called a good result in the context of the crisis and the fact that all countries, especially those outside the EU, will request more loans than before.

“The interest rate is higher than during last year’s Eurobonds issue, but that was inevitable for Serbia and other countries,” says Altiparmakov.

The original 2020 budget plans to borrow some five billion euros, including deficit financing and refinancing of loans maturing this year. In the recently adopted budget rebalancing, the state moved the debt limit to 7.5 billion euros for this year.

The plan of the Ministry of Finance is to obtain more than half through loans in the domestic market: € 3.8 billion, in the international market by issuing Eurobonds of up to € 3 billion, while about € 650 million, at least according to the budget, they are intended to be borrowed from institutional creditors. banks, development banks of the Council of Europe, Asian infrastructure banks …

Altiparmakov points out that the state will have to obtain most of the money that is missing from the market.

“Due to insufficient information in the general public, there was speculation about a possible IMF loan and European Union funds, which reserved around three billion euros for the Western Balkans.” Standard IMF loans refer to loans from the central bank’s reserves and are not comparable to financing for the budget. EU funds are earmarked for the budget, but the European Commission decision explicitly states that they are earmarked for countries with balance of payments problems, and Serbia is not. “On top of that, those 700 million euros are just 10 percent of the missing funds that Serbia should borrow this year,” says Altiparmakov.

Since the beginning of March, the state has already issued bonds for more than three billion euros. 207.4 billion dinars (about 1.2 billion euros) were sold in the domestic market in bonds with a maturity of one to 12 years. In addition, it was issued in three auctions and 90 million euros with maturities of two, five and 12 years.

Milojko Arsić warns that over-lending in the domestic market could lead to the so-called Squeezing Effect in which banks turn to state financing at the expense of lending to the economy.

He also believes it could have been better if the state first looked for cheaper funds from international financial institutions and then borrowed the rest from the market.

“Perhaps the plan is to test first in the market, and then take money from the IMF or the EU after the elections, as their loans would be accompanied by political conditioning. In principle, the IMF makes loans for foreign exchange reserves, but in emergency situations also for the budget, as it was in 2009. In any case, Eurobonds are better than everything that is acquired in the internal market due to the possible exclusion of the private sector, “says Arsić, adding that, In any case, it is necessary to borrow in the market due to the large deficit this year and the maturity of previous loans. July, since they will have the highest expenses in the next three months, when the income will be the lowest.

In fact, in the last month, there are very few countries in the global international market that have decided to issue bonds, and their debt conditions show how important it is to be a member of the EU, and even more important a member of the Eurozone.

For example, on April 25, EU member Hungary borrowed two billion euros, as did Serbia. Six-year Eurobonds will cost 1,125 percent a year and 1,625 percent twelve years, twice as cheap as us. Lithuania has also loaned two billion euros these days.

Ten-year bonds will cost 0.75 percent and five-year bonds 0.25 percent per year. Lithuania is a member of the eurozone and can count on the purchase of bonds by the European Central Bank.

Furthermore, Hungary has an investment rating of BBB, and Lithuania an even better A +. In late April, Israel also borrowed up to $ 5 billion over an incredible 40 years.

The annual interest rate is 3.8 percent. On the other hand, when lending a bad economy, it seems that in the case of Ukraine. They issued three-month bonds on the domestic market in hryvnia. For short-term debt of approximately € 344 million, Ukrainians will pay an interest rate of 11.26 percent per year.

Arsić points out that these interest rates reached in the market are a consequence of the growth in risk due to the crisis, on the one hand, and to the monetary expansion of the US Fed and the ECB, on the other.

“The interest rate we receive is not a surprise for a country like ours. And how much it means to be a member of the EU is shown in Hungary, which has a higher public debt, a higher fiscal deficit, is not exactly a favorite in the Union, but borrow cheaper, “says Arsić.

Clean account and clear difference

NBS Governor Jorgovanka Tabaković stated yesterday that “the allegations that Serbia borrowed at a higher price than would be the case with international financial institutions are incorrect and based on incomplete and unprofessionally interpreted data.”

“The International Monetary Fund funds offered through the RFI (Rapid Financing Instrument) imply that the country that uses them has problems financing the balance of payments. Serbia is not one of those countries. Furthermore, the withdrawal of these funds is not as favorable, except for relatively smaller amounts and in a shorter period of time than what Serbia managed to obtain by issuing Eurobonds, and taking these funds would mean for Serbia de facto to conclude a new three-stand-by agreement Years with this financial institution, that is, it would be equal to that agreement, although Serbia does not need that type of agreement, “said Tabaković.

He added that if the conditions for obtaining two billion euros were compared, the rates in the IMF’s RFI agreement would be between 3 and 4 percent, along with all the other additional requirements and restrictions that the agreement with the IMF would entail, in the short term. term. up to five years

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