Creditors reject settlement of Serbia’s debt; Serbs may renege

BELGRADE – The London Club creditors have rejected Serbia’s latest offer to settle a $2.4 billion debt, forcing Belgrade to start seeking legal alternatives to resolve the issue, a Serb source close to the talks said yesterday. The rejection came a week after a Serb delegation met the banks in London to present the offer, hoping to end eight years of on-and-off efforts to reach a deal. «The banks turned down our offer on Thursday. The position between Serbia and banks is as wide apart as ever, you can ride a train between the two positions,» the source, who asked not to be named, told Reuters. «Serbia will now have to examine all alternative legal options available because it does not want to be held hostage by a bunch of banks,» the source said and added that one of the options was to renege on the debt. While creditors declined to comment, analysts said the news was disappointing. «It appeared the interest of both sides was to cut a deal now before the conclusion of the presidential elections. Serbia wants to be able to secure a credit rating, investors want a more liquid traded instrument which can release some value,» Tim Ash of Bear Stearns told Reuters. Serbia elects a president on June 13 and hardline candidate Tomislav Nikolic, not seen as too keen on repaying debts to Western lenders, enjoys the greatest support. Alex Garrard of UBS said a debt settlement deal would be an important window of opportunity for both sides. «From a creditor standpoint, it is unlikely that the government would be in a better position to offer substantially better terms in a year’s time. From a government standpoint, debt repudiation is not an option the country can politically afford,» he said. Serb officials have insisted on getting a deal comparable to a write-off that was won from the Paris Club of sovereign lenders. In November 2001, the Paris Club granted Belgrade a 66 percent write-down on its $4.5 billion debt, 51 percent immediately and 15 percent upon completion of Serbia’s 2002-2005 loan agreement with the International Monetary Fund. But banks remained stuck at around 50 percent forgiveness, the Serbian source close to the talks said. Sources said the Serbian side was almost ready to go for a deal at nearly $1.1 billion but creditors would not trim down their demands of some $1.2 billion. But a key point of disagreement was a high interest rate of 9.0 percent in the later years of life of a new bond that would replace the New Financing Agreement that already rescheduled the former Yugoslavia’s debt in 1988. Serbs were hoping a rate of around 6.0 percent. «We may be young but certainly not irresponsible to agree to terms that would lead us to default within two to three years,» a senior government source told Reuters. The government is due to discuss the issue next week, the source added. Some sources said they expected the vast majority of creditors to push for the London Club chair to be more reflective of the Serbian situation. «It’s a real pity because there was a window of opportunity to exploit and it seems that banks deliberately did not want to use it. That window is now shut. There is no way we could change our offer,» the Serbian source said. Serbia’s offer was based on assumed 5.0 percent real GDP growth in the coming years. Serbia’s economy grew 1.5 percent in 2003 and is hoped to expand by 4.5 percent this year. Serbia is the last former Yugoslav republic not to have settled its debt with commercial creditors. Without the deal, Serbia can forget about getting its first-ever credit rating by Standard & Poor’s, which would pave the way for Belgrade to tap private capital markets.