"On October 7th the biggest European banks` shares have lost 60 percent of their value. The United States have decided to pump 700 billion dollars into the system, while since 2002, when the mortgage crises has started, it has given banks 900 billion dollars loans, i.e., the money sufficient for the annual average earnings of 22 million Americans. Total American debt has come up to 10,000 billion dollars", points out Mario Platero, the New York Stock Exchange expert.
Global crisis asks for global response. However, European countries are disputing over the model of response to the crisis. On one hand, German Chancellor Angela Merkel is advocating for banks alone to take responsibility for the capital market crash and governments to intervene individually, according to their interests, possibilities and scopes of crisis. On the other hand, French government insists on making mutual fund for banks salvation.
Above all, Island has just entered such a big crisis that the whole state, not only the financial sector, is threatened by bankruptcy while citizens fearing the crash are crowding banks wishing to withdraw their money. Even the biggest proponents of the liberal economy are now becoming aware of the states having to intervene, the move that can even hardly be the curing guarantee.
According to Otmar Issing, former member of the European Central Bank Board of Governors, the confidence in the world banking system is fading day after day and there is no doubt we are talking about the biggest crisis after 1929. It will have great after effect on world economic system and the main culprits are central banks that have been turning a blind eye to forthcoming collapse.
The Serbian financial market is small, relatively unstable and unpredictable, and therefore it is hard to foresee the extent of the world financial crisis impact. Nevertheless, the world stock exchange crash imposes certain challenges and calls for watchfulness so that important disturbance does not catch us napping.
With regard to the market extent, it is hardly possible to have major breakdown, but there will surely be indirect consequences since the state has foreign borrowings through so-called crossborder loans. Beside this, it has been learned in business circles that certain foreign leasing companies have quitted giving leasing for production plants renovation in Serbia and started taking money back to their resident countries.
It seems that the Government has reacted in time by forming the "crisis team", also called "task force", whose mission is to prepare tactics for hardly possible yet not ruled out financial blow in Serbia. The team includes individuals from the Finance Ministry, Belgrade Stock Exchange, Pension Fund, as well as brokers, banks and National Bank of Serbia and such joint effort could be very useful providing it does not end just in written form.
At the "Global Financial Crisis and Impact on the Region and Serbia" forum the National Bank of Serbia Governor said there were more mechanisms that Serbia can use to make its economic system stable. Essential problem lies in solving the current balance of payments deficit and, according to him, there are four models available: direct foreign investments increase, foreign borrowing, privatisation funds rational exploitation, and foreign exchange reserves limited use.
However, concerning three of four solutions Serbia has a serious problem. Ministry of Finance State Secretary Slobodan Ilic first indicated evident problem regarding direct foreign investments that can hardly be mended having in mind the world crisis. Such external factor is out of local government`s control. In addition, our country has serious problem with bureaucracy and corruption, something that surely is not a lure for investors.
Talking about further borrowing, in given circumstances it can only be more expensive. One of solutions is new arrangement with the International Monetary Fund (IMF) but the Government is hesitating to get involved in such agreement since the IMF has serious demands regarding reforms in Serbia. There is also substantial internal resistance to further foreign borrowing through warnings pointing out that we do not have powerful export product and therefore we are being threatened by the debtor`s crisis.
Until now privatisation revenues in Serbia have been spent dissipatedly mostly for mending budget holes and buying social peace and almost nothing has been streamed in production improvement. That way the money formally ended also in the National Investment Plan and out of it money was taken for painting municipality buildings and war daily allowances payments to Milosevic wars soldiers, something that surely cannot be considered investment.
Everything that could be sold easily, quickly and relatively expensively has been sold. Now we have the situation - in the Kragujevac-based car company Zastava (that could not be easily privatised) or Rudarsko-Topionicarski Basen Bor (engaged in the exploration, mining, smelting, and refining of copper) the State enters into the joint investments with foreign partners. This also means certain state investments (in the case of Zastava it is 300 million euros) as well as renouncing some revenues while the public still does not know where the State will draw the money from. Above all, the world financial crisis in Serbian economy has first struck aviation so that the Serbian government has decided to save JAT Airways that nobody was interested for at tender. Unofficially mentioned are 15 planes for leasing that is 250,000 euros annually per plane. The Government has still not informed citizens where that money comes from.
Finally, foreign exchange reserves. This is rare domain where Serbia is stable. In spite of the National Bank of Serbia having solid stock for occasional interventions on the market, it should not be overlooked that the foreign exchange reserves are limited resource no matter how big they are.
The proof of nobody being protected from economic hurricanes is the Moscow Stock Exchange that has been closed six times in the course of ten days. In spite of this measure, it has lost two thirds of its value, i.e., some 700 billion dollars. Such a crisis has not been recalled since the breakdown of the USSR since foreign investors, after the Georgia crisis, have pulled out from Russia 35 billion dollars in just one day. Russia is lucky it has accumulated 574 billion dollars foreign exchange reserves. Only Japan and China have more.
* Published: 2008/10/10
