Serbia Plans to Index New Dinar Debt to Ensure Budget Liquidity

Serbia plans to issue new six-month dinar debt this month and link it either to inflation or the euro to ensure smooth financing of its 2010 budget, Finance Minister Diana Dragutinovic said.

With dinar-denominated debt issues undersold and yields on the rise since June this year, the government needs to raise another 20 billion dinars ($248.17 million) to 25 billion dinars for liquidity financing of the budget.

“I want to be sure when it comes to the liquidity of the budget,” Dragutinovic said in a telephone interview. “The first option I am looking at, if possible at all, is to index the debt to inflation.”

Her preference for inflation-indexed debt is motivated by “dinarization” efforts designed to increase the share of the dinar in all banking transactions, still dominated by the euro.

Serbia’s consumer price inflation is seen at 9.6 percent in November, up from 8.9 percent in October and above the central bank’s target of 4 percent to 8 percent at the end of the year.

Linking the new debt to the euro “is my last option,” Dragutinovic said, adding that her ministry is also looking into linking the debt to “a trigger, such as a certain depreciation level of the dinar.”

The Finance Ministry will decide early next week, she said.

The government is expected to approve new debt issues at its session on Dec. 16, allowing the Treasury to call two new debt auctions on Dec. 22 and Dec. 29, the head of the Debt Management Agency Branislav Toncic told Bloomberg News.

The decision to amend the December borrowing calendar came after yields on dinar Treasury bill issues approached 14 percent, still attracting little investor interest amid the central bank’s policy tightening cycle, launched in late August to clamp down on inflation fuelled by soaring food prices and weak dinar.

The National Bank of Serbia raised its benchmark interest rate by a full percentage point to 11.5 percent yesterday, as it tries to make sure inflation returns to the target range at the end of 2011.

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