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Serbia Starts Government Talks to Avoid an Economic Slump

Serbian President Tomislav Nikolic began talks with political parties on forming a government, a month after inconclusive elections heightened political instability and weakened the dinar.

Nikolic has said he’ll give the mandate to form a Cabinet to anyone who can show they have a majority in parliament after the Democratic Party of former president Boris Tadic failed to do so by today. The Progressives, the biggest party in the legislature, asked the Socialists to form a coalition during the discussions, according to party leader Aleksandar Vucic.

“It is imperative that a government is formed as soon as possible as we have to stop the wild depreciation of the dinar,” Vucic told reporters after the meeting.

The result of the May 6 elections have pushed the dinar to record lows on concern a delay in forming an administration will halt progress on spending cuts and the renewal of a $1.3 billion international bailout loan. The currency has lost more than 12 percent this year, trading at 117.55 per euro at 1:40 p.m. in Belgrade, according to data compiled by Bloomberg.

Fiscal Outlook

Fitch Ratings said last week the Balkan nation needs to form a government quickly to ease concerns about its fiscal outlook. A delay to set up a Cabinet will entail harsher fiscal measures to rein in the 2012 deficit, Fitch said. The budget shortfall expanded to more than 7 percent of gross domestic product in the first five months and public debt approached 50 percent of GDP, exceeding targets.

The International Monetary Fund froze the loan program in February as it became clear it would slip on the agreed targets, including keeping the public debt below 45 percent of GDP. The economy contracted 1.3 percent in the first three months and Fitch Ratings forecast a stagnation this year.

Nikolic’s office reminded parties in a statement of “the difficult economic and social situation” as the meetings started. The legal deadline to form a government or repeat the elections is Aug. 29. Most politicians agree a Cabinet needs to be in place before the summer recess to revise the budget.

Tadic’s Democrats, with 67 seats in the assembly, had hoped to complement their alliance with the Socialists, which hold 44 seats, with a third partner that would give them the 126-seat parliamentary majority. In the outgoing Cabinet, the two parties had the of a party led by Mladjan Dinkic, a former finance minister and central bank chief.

Third Partner

The Progressives and the Socialists would control 117 seats and need another partner for a majority, possibly the Democratic Party of Serbia of former premier Vojislav Kostunica, which has 21 seats.

The Progressive party, which Nikolic founded before stepping down as leader after he won a May 20 presidential runoff election, wants to create a government led by Jorgovanka Tabakovic, the party’s vice president, Vucic said. The administration would have 12 ministries, down from the current 17, and seek savings of as much as 600 million euros ($746 million) annually from public procurements, he said.

The Socialists oppose Serbian recognition of Kosovo, the breakaway province where an ethnic-Albanian majority unilaterally declared independence in 2008. The European Union, which Serbia is trying to join, has said there needs to be visible and sustainable improvement, in ties with Kosovo in order to advance Serbia’s bid to join the 27-member bloc.

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