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Serbia Must Lower Debt to Avoid ‘Greek Scenario,’ Zivkovic Says

Serbia must lower its debt level and attract local investors to buy its bonds to avoid a “Greek scenario,” said Bosko Zivkovic, former chairman of the central bank’s Governor’s Council.

Luring institutional and small investors into buying bonds locally will limit the Balkan nation’s exposure to currency swings and creditors abroad, Zivkovic, who is now an economic professor, told reporters in Belgrade today. Serbia’s public debt stood at 57.5 percent of gross domestic product in October with more than 80 percent of the total denominated in foreign currencies.

“The aim is to minimize risk” and develop the debt market to avoid a “Greek scenario,” Zivkovic said after a panel of bankers and analysts discussed ways to reach out to small investors who keep 7.8 billion euros ($10 billion) in savings deposits with banks. “Japan’s debt is mainly in the hands of the Japanese, while Greek debt is mainly in the hands of foreigners.”

Prime Minister Ivica Dacic’s Cabinet, in office since July, is seeking to restore investor confidence by narrowing the fiscal gap to 3.6 percent of GDP next year from 6.7 percent in 2012 and aiming to balance the budget by 2016. The government also wants to bring down public debt to below the legal limit of 45 percent of GDP over the medium term.

Debt Servicing

The government will need 493.6 billion dinars ($5.6 billion) next year to service its debt, 25 percent more than in 2012. It will rely on dinar- and euro-denominated debt sales at home and dollar-denominated Eurobonds abroad until an upgrade in its BB- credit rating at Standard & Poor’s and Fitch Ratings, government officials have said.

The Finance Ministry should offer inflation-linked bonds to encourage investor demand in a country where the buyers are mainly banks, which have grown “risk averse to corporate clients because of recession,” Zivkovic said. Serbia is in its second recession in three years, with the economy forecast to contract 2 percent this year.

Linking bonds to inflation is not attractive enough for banks, which “prefer foreign-currency indexation,” said Bojan Lecic, the head of Treasury at the Belgrade-based Banca Intesa AD, member of Italy’s Intesa SanPaolo SpA. Inflation-linked bonds may be attractive if there’s evidence of long-term macroeconomic stability, public-debt sustainability, and a stable dinar and inflation, he said.

Inflation stood at 12.9 percent in October and could accelerate to 14 percent in December, the Belgrade-based Economics Institute said this week. The central bank target for inflation this year is a band from 2.5 percent to 5.5 percent.

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