Three Headlines And One Bit of Information

I read statements by leading directors in the Serbian Government on the dinar's crisis in last Friday's edition of the Belgrade daily "Politika". They said: "There can be no talk of a devaluation", "The names of those responsible for the foreign currency shock will be made public" and "Prices Hold Out". And while I look at their pictures, I ask myself, do they read the papers at all, have they read information carried by those same papers: "German Mark back to two dinars". They don't seem to think that two dinars for the German Mark is a devaluation (official rate is one to one). I am sure that their firms have already incorporated this rate into the prices and that, as good ministers, they will not hike prices. That's why others, who didn't react on time, will go to jail because they have disturbed the stability of the monetary system. Well, not all of us can be ministers.

The National Bank of Yugoslavia (NBJ) has no power to control the foreign currency rate for the simple reason that there is no foreign currency market. The foreign currency market was annulled after last year's October crisis when it was decided to maintain the official rate of the dinar artificially, but without success.

I received assurances from the NBJ, and believed them, that the money mass was strictly controlled. I was worried however, by the fact that the banks' dinar investments were growing at the expense of decreasing the remaining net assets. A change in the structure of the banks' assets structure is taking place, but the increase of investments is not being linked to the creating of money, because there is no increase in the money mass.

It is difficult to explain this situation. It seems that the banks were forced to empty their safes in order to finance a trade deficit, because the NBJ has no free foreign currency reserves. The banks sold foreign currency to their customers (or their trading companies) outside the foreign currency market and by pegging the rate. This did not create a new money mass defined as the M1 power unit, but enabled the increase of the banks' dinar investments. Pegging grew with the same money mass, because the whole operation wasn't carried out through the legal channels of the foreign currency market. The NBJ is powerless in this respect and this will go on until the foreign currency market is re-established.

The foreign currency shock started through the giro payment of foreign currency. There is a stable margin between the black street rate and that for payments abroad, but it toppled headlong on the eve of the foreign currency crisis. This was a sign for the street rate to zoom up.

A definite closing of the foreign currency circle of panic implies the existence of cash and an attempt to collect all the free foreign currency from the population. As a rule, this happens between Friday and Monday.

Jitters on the foreign currency market grew from the start of the crisis to its end, because new economic policy measures were expected. It had been announced that salaries would be unfrozen and exports/imports liberalized, all of which doesn't make much sense without a devaluation. The inadmissible wavering of the carriers of economic policy and a definite loss of belief that the dinar can retain the 1:1 rate to the German Mark, just served to help instigate a total collapse on the black foreign currency market with a relatively small sum of money. This is the sad truth about our monetary system.

The Serbian Government's energetic measures and its intention of settling the foreign currency chaos are to be greeted. But, arresting dealers and blaming the debtors will not solve the problem. If no lessons are learned from this crisis, we will soon find ourselves in some new crisis.

The reality that one dinar is not worth one German Mark, but two dinars at best, cannot be ignored. The NBJ cannot defend the dinar if the creating and the withdrawal of money are not linked to operations on the foreign currency market. The carriers of economic policy have different views on devaluation and are waiting for the last minute to announce their intentions which cannot receive public support if they are far removed from economic reality. Banks cannot be pressured informally and then expected not to defend their property. The NBJ cannot tolerate negative balances and at the same time attempt to control the money mass. A crisis of these proportions cannot result from just one wrong move or one guilty party. The problem lies in the system, which is all wrong.