Time is the Key Player

London, Vebruary - The Yugoslavs would like the price of their foreign debt to stand at zero on the financial market and their creditors want it to be as high as possible. The Yugoslavs don’t want anything that would raise the price of their debt and the creditors don’t want to trade that debt because they’re waiting for things to improve. Danko Djunic is going to win that battle.

When a British banker says all that over lunch in the City, the first thing you experience is enthusiasm followed by disbelief. Finally, it turns out that nothing is new in London or Belgrade.

VREME learned that negotiations are underway between representatives of the VRY and the International Committee of Commercial Banks (ICC) with the main focus being on time. Last week it seemed the creditors were in no hurry, but ICC experts told VREME in London that “time is always important and the amount of the debt isn’t that important”.
If ANZ bank research center chief Jerome Booth is to be believed, time is in the Yugoslav corner. He said the FRY’s creditors are not very patient. Unfortunately, the economic situation in the FRY is deteriorating daily and that can’t suit either side. The best strategy would probably be to hurry slowly. The creditors (large commercial banks) have a much bigger problem in south east Asia right now and want to clinch a deal with the FRY to be able to focus completely on that side.

“Markets exist for every debt; it’s a matter of assessment whether a debt will be held or sold. As the economic situation improves in a country, the price of the debt goes up. In Yugoslavia’s case, the debt held by a fund or bank is a8very risky investment,” said Milan Elezovic of the Nomura east European trade center. Andrew Cunnigham, of Meryl Lynch, said his bank got rid of its part of the Yugoslav debt a few years ago and feels there should be no dealings with the FRY. The FRY delegation paid a visit to that bank in London and its attitude might change. Sources in the City might say that the attitude is based on the fact that Meryl Lynch lost its consulatancy deal with the FRY to Nat West, but the overall impression is that London’s financial circles are discussing everyone else (Bulgaria and Romania primarily) more than the FRY.

The price of the debt will determine how much of the FRY’s foreign debt will be written off and the story is important because of that.

“Realism is needed on both sides. You can’t expect the price of that debt to be the same as it was 10 years ago. I believe an agreement can be reached at about 30 cents to the dollar. The big creditors are preventing that kind of deal. Even if it is reached, Yugoslavia will need additional sources of capital. The talks with creditors should be seen as a possibility to get capital. You can’t get any from the International Monetary Fund but you might get some from the London Club. Creditors should be convinced what the real price of the debt is, and I believe an agreement will be reached. The US administration won’t stop that agreement,” Booth said.

BNP’s chief analyst David McWilliams also feels that the FRY can’t survive without a large part of its debt (2.5 billion USD to the London Club of banks) being written off. He believes at least half should be written off and that the FRY should insist on issuing interest arrears notes (IAN) and interest rates will be lower than market rates for the next five years (front loaded interest reduction bills)

Booth urges payment of interest (some of the interest at least) because that would be a good sign to creditors if the FRY wants to attract capital. “An agreement can be reached, but its conclusion will come at the moment when the government doesn’t have the money to meet its obligations,” he said.

So if it doesn’t have money, it has companies. So can the problem be solved through a debt for equities swap? ICC experts said the talks haven’t progressed that far yet but added that the issue can be discussed.

“If the current owners of the debt think they can buy Yugoslav companies at large discounts, this suits them. They know they can make a profit. If they paid 30 cents to the dollar for the debt and the debt-equity swap allows them to buy shares in companies at a dollar for dollar rate, it’s a good deal,” Elezovic said. Experts said it’s important for creditors to have an adequate escape strategy: will privatization be slow or quick; will they be able to sell shares swapped for debts quickly; will foreign companies be interested in buying them.

On the other hand, there are warnings that Yugoslavia would not prefer that model of paying its debts because the price of the debt would rise immediately. A London banker said a much better solution would be to solve the internal debt problem through a debt-equity swap. the VREME sources in London all agreed on one thing: Yugoslavia has to send a clear signal that it wants reforms.