radovan jelasic : serbia ’ s economy – on the right track speech by mr radovan jelasic, governor of the national bank of serbia, at the 7th serbian economic summit, belgrade, 15 october 2007. * * * ladies and gentlemen, i guess there is no “ free dinner ” for a central banker, let alone a free lunch. and though we as central bankers traditionally tend to be more cautious than anybody else, trust me, there is no reason for you not to enjoy the rest of your evening! the national bank of serbia is run by a young management team that strongly believes in the “ invisible hand of the market ” and focuses on the medium and long term objectives only, despite a wide mixture of different monetary and exchange rate policies followed in our region. since the very beginning of the transition process, namely since october 2000, we have been hearing our politicians, scholars and economists speak of the advantages of the currency board or pegging our currency to the euro or even embarking on full euroization as opposed to the free - floating of the exchange rate and active use of monetary policy in order to achieve price stability. recent developments, however, have taught us that all praised and hailed examples are very much short - lived, as inflation under the currency board regime is rising, e. g. 9. 3 % in bulgaria year - on - year and 10. 2 % in latvia, while even montenegro is facing the challenges of a resurging inflation which reached 4. 2 % during the first 8 months with euro as legal tender! i hope that mr. jurgen stark, member of the executive board of the european central bank will allow me to quote from his speech given exactly two weeks ago in which he emphasized the very same argument that i would like to share with you tonight! let me start with the first quote “ to give you a striking example of macroeconomic performance depending on the underlying exchange rate regime, the countries with hard peg regimes have recently experienced a very rapid catching - up process, with cumulative real gdp growth standing on average at 18 % in the past two years, which is almost twice as fast as the growth rates observed in the countries with flexible regimes. to some extent, this might also reflect the fact that the income level in the fixed exchange rate countries is on average still somewhat lower compared with the countries with flexible rates. likewise, inflation in the countries with hard peg exchange regimes was almost one and a half times higher in the past two years

the financial sector. however spreads are still high compared to pre - august 2007 levels ( see slide 8 ). even sovereigns have not been immune to the increased credit risk valuations ( see slide 9 ). following the announcement of the rescue packages, the cds - spreads for sovereigns seem to have stabilized. the mandate of the sub - committee is to aim at promoting further the integration and better functioning of eu government bond markets thereby impacting positively on the financial markets as a whole. in relation to issuance terms in this volatile market the bond yields have been declining compared to level in july 2008 ( see slide 10 ). this movement has primarily been driven by a flight to safety. nevertheless the demand for government securities can be quite volatile. the latest round of financial turmoil has indeed lead to pronounced increase in the volatility both in the stock and bond market ( slide 11 ), which from an issuers standpoint makes it difficult to manoeuvre in terms of coming out with timely issuances in such an unpredictable market environment. in addition increased credit risk and demand for liquidity have widened the yield spread to german government securities and thereby aggravating the relative issuance terms for other emu - countries ( see slide 12 ). under the assumption that the yield spread between member states purely can be explained by differences in credit risk and liquidity, one may use prices on credit default swaps ( cds ) as an approximation for the credit risk premium. the liquidity risk may then be defined as the residual of the yield spread after deducting the credit risk premium ( see slide 13 ). the calculation shows that the widened yield vis - a - vis germany in 2008 compared to 2007 is predominately caused by increased credit risks. the financial turbulence has elucidated the role of the government securities as safe havens ( see slide 14 ). under normal market conditions the swap market may function as a substitute for government securities especially in terms of it's virtues in regards to pricing. however the increasing credit and liquidity premiums imply that this type of substitution is no longer valid. market conditions in general banks are under pressure. they experience rising funding costs and declining market value ( see slide 15 ). the capacity of the balance sheet is constrained making it more difficult to handle the intermediation phase between issuers and end - investors. in addition, the constrained balance sheets combined with increased volatility have lead to widened bid offer - spreads in the secondary government