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How distressed is Serbian debt?

Serbian debt is undergoing something of a rally. The restructuring of the country's $2.4 billion in London Club debt seems finally to be gathering momentum, and analysts are calling it the next big CEE convergence trade. But are they getting over-excited? The Serbian minister of finance thinks so.

Djelic: sceptical that the rally in Serbian debt prices is based on fundamentals

THE STORY OF Serbian debt is complicated. In fact, as Jerome Booth, head of research at Ashmore Investment Management, says: "It's the most complicated instrument in emerging markets." The first complication, is that it was originally Yugoslav debt.

The other countries that were formally parts of Yugoslavia have all completed their own restructurings, leaving around $2.4 billion in principal and past deferred interest (PDI), as well as the precedents of what sort of deals they struck. Another complication is that the other countries paid back principal but ignored PDI, quite legally under the contract of the original debt. This means that Serbia has less principal remaining than the IMF originally decreed, but more PDI.

A third complication is the form the debt takes. Around $330 million is in two obscure structures called trade deposit facility agreements and alternative participation agreements. These aren't liquid, and for the purpose of this article we can ignore them. The slightly more liquid debt is the $2.4

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