Bonds of the Republic of Serbia

Short-term bonds of the Republic of Serbia were the best deal the banks made last year. They have shown that the people act rationally even in the conditions of war economy, that the banks have adopted a modern approach to business and that the state is mishandling the financial markets.

In the past year the republic of Serbia acquired 5 billion dinars from the sale of short-term bonds, with its interest rate receipts amounting to 28,5 million dollars. It put some of its short-term credits on the money market for liquidity and paid 25 million dollars to the banks as commission for adequate banking services. The bonds had a clear advantage over other securities: they reaped the biggest financial benefit and had the best guarantor - the Serbian state.

When changes and amendments were introduced in the famous Loan Law (Loan for Serbian economic revival), it was said that the bonds were being used to collect current working capital for financing economic development and for satisfying general and common needs. When all accounts were settled at the end of last year, it turned out that 2,26 billion dinars had been paid to pension and invalid funds in the form of short-term credits, while the remaining 2 billion dinars had been spent for paying up the matured bonds! So 45% of the Loan had been used for crediting the non-productive consumption (and not for development), while the banks kept 40% so that the Loan could be continued.

Owing to all this, the Serbian state has no choice but to continue with the loan it started. If by some miracle the trust of money owners in the state of Serbia (as a secure guarantor) should be shaken, the republic budget could not finance the non-matured bonds. The republic budget is already deficient and it could not be maintained without a considerable money issuing. Money issuing, however, encourages hyperinflation and when the real interest rates ranging from 2% to 4% are added to it, the servicing expenses of the loan increase.

The dilemma is far from simple. If the loan is to be discontinued, the republic of Serbia will not be able to pay out the bonds it already sold, or it will have to increase the budget deficit. If the loan is to continue the loan servicing expenses will soon become unbearable. This presents us with the classic

dilemma of every state concerning the handling of public debt. Does the state of Serbia have any idea what the optimal value of public debt really is and to what extent will its servicing disturb the republic budget?

The worst thing here is the budget deficit which nobody is taking care of. It is obvious that its financing from the primary money issuing leads directly to hyperinflation. However, the people are still deluding themselves that they can live well with budget deficit if money issuing is replaced with the emission of short-term bonds. It is true that the pressure of inflation will be eased but it will soon turn out that the budget is much more difficult to balance out than before the bond issuing.

If the state is spending more than it earns, the money market can not solve this problem. The inverse effect is possible too - that the budget deficit destroys part of the money market (including issuing of short-term securities). There is real danger inherent in this. These days bond owners have not been paid out in cash: the cash has been transferred to their current accounts instead. The general shortage of cash in certain banks does not maintain the trust the people have in the money market.

It is worth noting that the biggest amount was paid during the last two months of last year for bonds maturing in 90 days (over 70% of all bonds). This shows that tax exemption is the main quality of these bonds. This also tells us that the people are behaving rationally and that they are using their money wisely.

It would be good if Serbia would handle its debt in a similar way. Experience from the past calls for caution; we must remember how the foreign debt of the country, the internal debts of the companies and banks have got out of hand and can no longer be controlled. It would be very bad if the new institutes of public debt and its financing issued bonds with the same effect.