Serbia sells euros after Kosovo declaration

BELGRADE (Reuters) – Serbia’s central bank stepped into the foreign exchange market to support the dinar yesterday, a day after the province of Kosovo unilaterally declared independence. Two ratings agencies said the news would not immediately affect the country’s debt ratings, but they and some analysts added that the future of Serbia’s relations with the European Union would be a key factor for the future. Meanwhile, the central bank, which had raised interest rates by 75 basis points earlier in the month, left its key policy rate on hold despite price pressure concerns. The central bank sold -10 million to banks in the interbank market to help the dinar, which has lost 4.3 percent so far this year. Banks had refrained from buying and selling earlier in the day, seeking direction. «This was totally uncalled for,» one currency dealer said. «The dinar was fairly stable and there is liquidity, it’s just that no one really wanted to test any direction.» The dinar was priced at 83.53/83.64 to the euro at 16.40 Greek time. Ratings agency Standard & Poor’s said Kosovo’s secession would not affect credit ratings (BB-/Stable/B) for now but these may well depend on the country’s future attitude to the EU and its future fiscal and economic policies. Fitch Ratings said the destabilizing influence of Kosovo had already been factored into Serbia’s long-term foreign and local currency ratings of BB- but its disputed recognition carried risks, from «inflaming nationalist sentiment within Serbia» to halting Serbia’s EU drive. Explaining its decision to keep its key two-week repo rate unchanged at 10.75 percent, the central bank said lower-than-expected January core inflation gave no immediate reason to tighten further, but it would continue to monitor prices and act if needed. «Considering that January core inflation of 0.3 percent was lower than expected, and that the rates were last changed at the start of February, the Monetary Board considers that right now there is insufficient information about the impact of monetary policy tightening on core inflation,» its statement said. But the first three months of the year were likely to see strong price pressures, it said, adding that inflation would depend on fiscal expansion, rising global inflation, higher energy prices and stronger than usual currency swings. The bank raised its two-week repo rate by 75 basis points on February 6, on growing signs it could miss its 2008 core inflation target of 3-6 percent. It sees core inflation at 7.0 percent and headline inflation at 11.0-11.5 percent at the end of March. Simon Quijano Evans at Unicredit in Vienna said everyone was waiting for further reactions to the Kosovo situation in Belgrade. «What we need to see is what happens with Serb-EU relations, whether the Serbs will put that on freeze.» Some hardline Serb politicians want Belgrade to cool ties with countries that recognize Kosovo as an independent state, and the ruling coalition is split on whether Serbia can continue on its path to EU membership. Hardliners in the government say the EU must choose between Kosovo and Serbia, and give up on its supervisory mission to Kosovo if it wants Belgrade to join the EU. Richard Segal, fixed income strategist with Renaissance Capital in London, said the political implications of Kosovo’s secession will be complicated to untangle. «But from at least one perspective, Serbia’s credit rating should improve. Serbia had on its books about $1.3 bln of claims against Kosovo. However, it had not received any revenues from the province for servicing these claims,» Segal told Reuters.