Issue of war crimes weighs on investment

LONDON – The failure of both Croatia and Serbia to hand over suspects to the United Nations war crimes tribunal at The Hague has cast a shadow over their ambitions to join the European Union. But while investors see Belgrade’s recalcitrance as further proof that they should stay away from Serbia for now, they are relatively relaxed about Zagreb’s problem. The European Union said on Thursday it would not start entry talks with Croatia unless it hands over its top war crimes suspect, Ante Gotovina, who disappeared in 2001 to evade an imminent indictment for the killing of Serb civilians in 1995. The bloc’s tougher stance emerged after a hard-hitting report from United Nations war crimes prosecutor Carla del Ponte, obtained by Reuters this week, in which she accused Zagreb of stalling while some men in power protect Gotovina. Croatia has maintained it does not know where Gotovina is and is doing everything it can to apprehend him, although President Stjepan Mesic admitted on Friday that the country hadn’t done «all that was necessary.» The former Yugoslav Republic is scheduled to start accession talks on March 17, with the goal of EU membership in 2009, and its illiquid asset markets slipped this week on concerns over a potential delay. The Croatian kuna fell over 0.5 percent against the euro, though it recovered some lost ground on Friday, while Croatia’s benchmark 2014 Eurobond has widened to 43 basis points over German Bunds, from a 35-40 range seen in recent weeks. Despite the short-term slippage, investors have confidence that Croatia’s EU bid will remain on track. «Generally, politics is having a smaller and smaller impact on investors’ moods,» said Matthias Siller, a fund manager at Raiffeisen Capital in Vienna. «I think ultimately a solution will be found whereby Croatia will not lose its face and nor will del Ponte.» Siller likened Croatia’s position to that of Romania just over a year ago, when it came under fire from the EU for high levels of corruption. Romania has since been granted a date to enter the EU in 2007. «In Romania, the EU was saying 14 months ago there was corruption from the smallest to the highest rank in the country’s bureaucracy. Now it seems everyone is happy, there’s been a major turnaround. «That tells me there can be a quick solution here and the issue won’t prevent this generation of Croats joining the EU.» Tim Ash, emerging markets analyst at Bear Stearns, said even a delay wouldn’t put investors off too much. «Croatia is a very developed country and I don’t think this is an enormous focus for people. They’re taking the view that Croatia will eventually get in the EU, and whether it’s 2009 or 2011 doesn’t matter all that much.» A Reuters poll of analysts conducted last week found that most still expect the 2009 timetable to be met. Economic indicators suggest this is achievable – Croatia’s budget deficit was around 4.5 percent of GDP in 2004, below that of EU members Poland and Hungary. Slow progress in Serbia The war crimes issue is seen more of a deterrent to investors putting money in Serbia than it is in Croatia. The EU said earlier this month that no progress would be made toward the much more distant prospect of membership for Belgrade until it cooperates fully with the Hague tribunal. «It could be the next converging market if they sorted things out on the political side, but I don’t see they are really doing that,» said Margarete Strasser, a fund manager at Capital Invest in Vienna. One suspect, General Vladimir Lazarevic, surrendered earlier this month, but EU Commissioner Olli Rehn said sending people «only when they finally decide to come» was not enough. Analysts fear the standoff could drag on for some time yet. «The Serbian press has been so nationalistic in the past 10-15 years, taking the view the Hague tribunal has been set up to hinder Serbia rather than punish those who deserved to be, that it will be tough to turn public opinion around,» said Richard Segal, an analyst at emerging market debt specialist Exotix. Serbia remains a destination only for the hardiest of emerging market investors, though some said that could change in the years ahead. «It could get interesting in one or two years, but it’s really slow going. We need to see that the old Yugoslavian bonds are clearly restructured,» said Strasser. Serbia won a deal with the London Club of commercial lenders in July 2004 to write down 61.9 percent of its $2.6 billion debt, agreeing to settle it with a new $1.08 billion Eurobond. The bond was originally slated for launch last November, but has been subject to technical delays. Segal at Exotix said he expected the launch by the end of next month.

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