Contrasting with the bullish prices of much emerging market debt, Yugoslavia's has dropped from being traded in the high forties a few weeks ago to a low of 35%, following inconclusive talks held at the end of June between the government of the Federal Republic of Yugoslavia (the FRY consists of Serbia and Montenegro) and the relevant London Club committee. Some analysts think the price could go lower still.
The reason for the sudden decline in Yugoslav debt is the very aggressive terms of repayment that the government has put on the table. The committee, headed by Chase, feels that the recent proposals to reschedule the debt are unacceptable.
When the former Yugoslavia split, the newly independent FRY assumed responsibility for the lion's share of the old debts. As the biggest of the former Yugoslavian republics, the FRY's financial situation was, at the time, deemed good enough to merit it taking this on. So the question has to be asked: why is the country now pleading poverty for its terms of repayment?
Ingrid Iverson, a debt strategist at UBS, believes that the Yugoslavs did not make their proposal expecting it to be accepted, but as an opening gambit to try to force the price of the debt down. "The FRY government proposed terms for the debt to be paid back over 25 years, with an 80% forgiveness rate. This is a much bigger forgiveness rate than any other comparable country has received, and the fundamentals in the FRY simply don't merit it."
However, not everybody believes that the FRY is deliberately playing down the state of its economy in order to diminish its repayments. "It is a bankrupt economy," says one banker, "and this is going to leave creditors with two choices. They are either going to be faced with a percentage of debt reduction, between 30% and 50%, or they are going to have to live with very low interest payments over a number of years, which will also greatly reduce the amount of money actually being paid back."
As a consequence many bankers, including Iverson, believe that at 37 cents in the dollar on the secondary market, Yugoslav debt is still "10-15% overvalued", and nobody yet knows whether even 30% forgiveness will be enough to satisfy Yugoslav demands. "The FRY came to the table with an aggressive request," says Neil Lockwood, an economist at Australia & New Zealand Banking Group. "They just won't agree to a deal which sees only 30% debt forgiveness."
A number of the FRY's creditors are becoming increasingly annoyed with the situation, as previous to this latest proposal, most people were expecting a deal with zero debt forgiveness. The FRY's aggressive tactics at the negotiating table have largely put paid to the prospects of finding a compromise. Additionally, many bankers feel that the FRY is not yet in any sort of position to make overtures to the financial community about paying back its debt and is consequently just wasting everybody's time. "This meeting has come much too early," says a strategist close to the negotiations. "The FRY can't make a deal before joining the IMF and that's not going to happen any time before the end of 1998."
The FRY has to join the IMF, say some observers, in order to reassure its creditors that it has the will and ability to repay its debt. However, if membership is contingent on sorting out the remaining problems in Bosnia and the surrounding areas, it may well take anything between three and five years before IMF membership, or membership of any other multilateral, is on the cards.
Until the US is satisfied that the situation in the Balkans is being properly resolved, say some analysts, it intends to use its substantial influence to keep the carrot of IMF membership hanging over the FRY's head. Katrin Fhima