Radovan Jelašić: The impact of the crisis on Serbia's financial sector
Speech by Mr Radovan Jelašić, Governor of the National Bank of Serbia, at the "Conference
on the Future of Financial Markets of Central and South East Europe", Sarajevo,
23 October 2008.
* * *
"We are acting with unprecedented speed taking unprecedented measures that we never
thought would be necessary", said the US Treasury Secretary, Mr. Paulson on 14 October
this year - and the world is slowly beginning to understand the full meaning of his words. The
Government has returned in style, replacing banks as lender but also as guarantor, and even
owner of financial institutions. And, in a matter of days, circumstances have changed so
much that such moves are not only approved, but even welcomed and applauded!
And while we know that, after these turbulences in the global financial market, nothing will be
the same, all we know about the crisis itself is that it has reached one of its many peaks over
the past few weeks and that its depth and duration cannot be foreseen. Today, I would like to
talk about the impact of these unprecedented challenges on the financial sector of Serbia,
focusing in particular on:
1. Effects so far
2. Likely future course of the crisis
3. Long-term effects
1. The effects on the Serbian banking system are already evident, as private individuals have
lost no time in responding to external shocks. Fortunately, as our citizens have long ago
learnt that it is not clever to wait for the unhurried and overly optimistic politicians to explain
what the future has in store, the following trend has emerged since Q2: а) receding volume
of borrowing by households, with the exception of mortgage loans, b) much pricier new
loans, c) notable slowdown in external borrowing by banks. In several months, we will feel
nostalgia for the "good old times" when we, the central bankers, strove to suppress the credit
boom by all means available and with different success. But where central banks have failed,
financial crisis has succeeded, by force. And to be honest, commercial banks did go a step
too far: a) they advertised borrowing and borrowing alone, with hardly any mention of
savings; b) products were offered by banks, but also by agents, merchants, etc.; c) telephone
calls to potential clients became a usual practice, luring customers into yet another cash
credit or credit card.
However, my main concern is not whether private individuals will manage to repay their loans
or not. The real question here is what will happen to enterprises. With the Government itself
paying a margin of 3-4%, which source of finance can enterprises rely on? And if the entire
economy can only borrow at double-digit interest rates, and even such borrowing is in short
supply, how will this reflect on the country's economic growth?
At this point, we may safely conclude that the measures taken by the US and EU
governments and their respective central banks have so far produced no results, that money
has not been costlier for over a decade, that the key policy rates of central banks and the
market price of money (EURIBOR) are still moving in the opposite directions, that excess
money pumped into the banking system by the ECB is returned in the form of deposits rather
than lending, while trust among financial agents has troughed and the economy is already
heading for recession!
2. It is practically impossible to foresee the future course of the crisis. Earlier taboos, such as
the valuation of balance-sheet categories, are being broken overnight, the governments are
nationalizing the banking sector in order to "strengthen the market mechanism", stock
exchanges are even rewarding such moves and there is no end to government plans!
Learning from history, the governments have clearly decided that it is better to overreact than
underreact, but, unfortunately, with little success so far!
The future course of events will largely hinge on:
•
How far will the Government go in acquiring ownership of the banking sector and
when and how will it pull out - if, indeed, it wants to?
•
To what extent can central banks replace the financial sector as lenders and should
they do so?
•
What will happen if governments are really faced with the obligation to pay out a
major portion of the promised funds, which could well lead to bankruptcy as in the
case of Iceland?
The situation is already unravelling, and a number of countries - primarily Ukraine, Hungary
and Kazakhstan - are mooted as potential "victims"! Why these countries? The answer is
fairly simple: a) high level of debts maturing in the next year - question of possibility and cost
of refinancing, b) high share of foreign currency clause indexed loans, with savings mostly in
the domestic currency - at times of exchange rate turbulences, c) heavy dependence on
inflow of foreign capital (foreign direct investment and foreign borrowing). The only reason
why Serbia is not in the same category as these countries are its high foreign exchange
reserves, restrictive monetary policy and banking supervision. I must say I am rather pleased
that armchair critics are now praising my "farsightedness" and "conservativeness" which
have turned out to be the key buttress of stability of the Serbian financial sector.
3. And finally, we need to face the long-term effects of this crisis which will certainly last
much longer than was expected several months ago. When I speak of these effects, I will
focus on our region and country:
•
The Government is returning in style, and I am, personally, slightly apprehensive of
this because of my experience with the Government and its mechanisms. The role
of the Government will increase, both in the financial and in the real sector. The only
hope left is that this role will remain indirect, rather than direct, and that it will be of
limited duration!
•
The role of financial sector supervision will gain strength, both locally and in the EU.
There is always a positive side to any crisis, and now Europe has understood that a
single monetary and economic union is incompatible with a nationally-based
financial sector supervision. This is simply a negation of reality.
•
The old adage: "What you pay is what you get" best illustrates the period ahead of
us. Domestic deposits will come to play a key role in financing both enterprises and
households. And because of this, we will need to invest even more efforts to
maintain a stable financial sector and build up public trust in the banking sector. This
will be a major challenge, especially given our recent history and the efficiency of
the media in whipping up unnecessary panic.
•
The banking industry is in need of a thorough overhaul! Not only will the job of
supervisors finally receive the respect and appreciation it deserves, but commercial
bankers will also have to tighten their belts a little and be more realistic.
And just one final comment: although, as central bankers, it is our job to be "concerned", this
time there is really much cause for worry. That I, at my 40 years of age, am concerned is
perhaps not as important as the fact that reputed central bankers of 60 and more are - and
they have already been through thick and thin. But the challenges we are now facing are also
an opportunity, and I am sure that once again we will come out as winners!