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Serbs Seek $115 Million at Auction as Cabinet Debates Budget

Serbia sold a fifth of bonds offered amid weak investor demand as the government meets to endorse a fiscal plan aimed at enforcing cost cuts to narrow the budget gap.

The government sold 1.9 billion dinars ($21.7 million) in three-year debt of 10 billion dinars on offer, the Debt Management Agency in Belgrade said in an e-mail today. The average yield on the 10 percent coupon bond rose to 10.5 percent from 10.49 percent at an April 23 auction. Investors bid for 2.4 billion dinars of the debt.

The government was due to meet at 11:30 a.m. in Belgrade to adopt measures to trim administrative costs and sell unprofitable companies, while avoiding cuts in public wages and pensions.

The 11-month old government of Prime Minister Ivica Dacic left the budget deficit at 6 percent of gross domestic product in the first quarter, stoking investor concern over fiscal discipline. European Union leaders decide on June 28 whether to set a date for the beginning of membership talks for the country after its efforts to normalize ties with its breakaway Kosovo province.

Foreign investor demand could weaken today “due to increased global markets’ volatility and Serbian fiscal slippage feeding into rating downgrade risks,” analysts including Hrvoje Stojic at Hypo Alpe-Adria Bank d.d. in Zagreb said before the auction in a note to clients on June 24.

Downgrade Risk

Prospects that the U.S. Federal Reserve will gradually end bond purchases by mid-2014 reduced the relative attractiveness of developing-nation assets, triggering a sell-off in global markets. Yields on Serbian 10-year Eurobonds maturing in 2021 fell 21 basis points to 7.18 percent as of 12:06 p.m. in Belgrade, snapping a four-day increase of 128 basis points to a record high 7.47 percent yesterday.

Serbian bond yields “have been hit considerably more than most of its rating peers” Gabriel Sterne, the emerging markets economist at Exotix Holdings Ltd. in London, said in an e-mail. “Spreads on 21s have increased by 150bps more than similarly rated Uruguay” and “current market conditions are probably of the type that are looking to punish those who fell short on correcting imbalances in the previous benign conditions, and now look more vulnerable in much more difficult conditions.”

Widening Gap

The government plan raises the 2013 budget gap to 177 billion dinars, or 4.7 percent of gross domestic product, from a previously planned 122 billion dinars. Serbia risks a downgrade in its credit rating unless the government squeezes spending more, promotes export growth and secures a new agreement with the International Monetary Fund, Standard & Poor’s said in May.

The nation’s fiscal gap may balloon to 8 percent of GDP this year if the government leaves policies unchanged, the IMF said on May 22. The lender refrained from negotiating a new precautionary loan, which Serbia wants as proof to investors that the government’s policies are on track. Standard & Poor’s rates Serbia BB-, or three levels below investment grade, with a negative outlook.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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