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Yugoslavia: Belgrade Seeks Write-Offs On Two-Thirds Of Foreign Debt

Yugoslavia's most critical economic issue is how to deal with more than $12 billion in debts owed to foreign lenders. Belgrade wants to win a substantial debt write-off through talks with the so-called "Paris Club" of government lenders and the "London Club" of commercial creditors. But before negotiations can be resolved, the International Monetary Fund must approve a standby agreement with Yugoslavia.

Prague, 2 May 2001 (RFE/RL) -- Yugoslav officials say they have made progress in recent days on a key step toward restructuring the federation's massive foreign debts -- obtaining a standby agreement with the International Monetary Fund.

The standby agreement initially is needed to unlock disbursements on a $260-million IMF loan program for Belgrade. But more importantly, a standby deal represents the IMF's stamp of approval on a country's economic program and will allow officials to move forward in talks on debt restructuring.

Repaying debts to government and commercial lenders is the biggest burden Belgrade faces while trying rebuild a shattered economy in the aftermath of ousted Yugoslav President Slobodan Milosevic's regime.

Yugoslavia owes some $5 billion to Western governments in the "Paris Club" -- and an additional $7 billion to other lenders that make up the "London Club" of commercial banks and private lenders.

That means the total foreign debt of more than $12 billion is higher than the most optimistic forecast on Yugoslavia's gross domestic product this year -- about $11 billion. Statistics provided to RFE/RL by the European Bank for Reconstruction and Development show Yugoslavia's external debt is more seven times bigger than the annual value of the country's exports.

EBRD chief economist Willem Buiter warns that such a high debt burden is unbearable and could undermine the fragile stability in the Balkans.

Buiter says he thinks the only way out for Belgrade is to try to convince both the Paris and the London clubs to "forgive" (that is, write off or cancel) some of the country's debts.

"There has to be serious write-downs. If ever anything was obvious, then that is -- we're talking debt forgiveness. [Yugoslavia is] a country that is deeply indebted and simply cannot get out of that situation given the state it finds itself in after 10 years of Milosevic and economic isolation."

Yugoslav central bank Governor Mladjan Dinkic met on Sunday (April 29) with IMF officials during their spring meeting in Washington to discuss Belgrade's new economic program.

Dinkic says an IMF committee has approved a memorandum on Yugoslavia's economic and financial policies. He says he expects the IMF board to formally approve its loan program with Yugoslavia as soon as next month.

IMF spokeswoman Conny Lotze has confirmed the IMF has reached a preliminary agreement with Belgrade on a reform and stabilization program for this year. Lotze says the IMF Executive Board could approve the program in early June. But she also stresses that Belgrade must meet what she calls "certain conditions" to resolve budget problems linked to external financing.

Lotze declined to elaborate. But an IMF statement in March said the institution was looking for assurances from the Paris Club that members would be ready to restructure Yugoslavia's debts "on appropriate terms."

Dinkic said talks with the Paris Club are to start soon and that he expects the main meeting with the creditor nations to take place in July. He also said Belgrade has already asked its creditors to write off about two-thirds of Yugoslavia's debt.

Dinkic said Belgrade cannot guarantee its ability to meet payment obligations if less than two-thirds of its debt is forgiven.

Compared to the deals struck with most other East and Central European countries during the last 10 years, a write-off of two-thirds is relatively large.

Poland's debt deals with commercial and government lenders in the early 1990s represented a write-off of about 40 percent. Bulgaria in 1994 reached a 48 percent debt write-off deal with commercial banks in the London Club.

Likewise, Russia saw about 35 percent of its commercial debt written off recently when the obligations were restructured into bonds.

But EBRD Deputy Chief Economist Ricardo Lago says Belgrade's calls for a two-thirds write off are not excessive. Lago says the most appropriate comparison to the Yugoslav debt crisis is Bosnia-Herzegovina. He says average incomes and the overall debt-to-gross-national-product ratios are similar in both countries.

"The resolution of the debt problem in Bosnia could be a rehearsal for Yugoslavia. Bosnia got about a two-thirds debt reduction from the commercial banks and from the bilateral creditors. [Of course,] in [all of] these agreements there are conditions linked to economic performance and reforms."

Ultimately, the decision on the size of any debt reduction for Belgrade is a matter for the Paris Club and London Club to decide. But the EBRD is playing a role to stimulate debate on the issue within the international financial institutions.

The arguments of the EBRD's top economists show that as long as Belgrade remains on the path of economic reform, it will not be alone in its call for a two-thirds debt write off.