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Yugoslavia: Bank Closures Seen As Important First Step In Rebuilding Economy

Yugoslav officials on 3 January announced the closure of four Socialist-era banks, sparking the resignation of Yugoslav Finance Minister Jovan Rankovic and protests by hundreds of bank employees. Analysts say the banks were plagued by mountains of debt and low public confidence. RFE/RL correspondent Alexandra Poolos looks at the bank closures, which mark one of the largest-ever corporate shutdowns in Yugoslavia, affecting 8,500 people.

Prague, 8 January 2002 (RFE/RL) -- About 100 laid-off bank employees blocked one of Belgrade's main streets today to protest the recent closure of the country's four largest banks, bringing the capital's traffic to a standstill.

Yugoslavia's central bank shut down the institutions because they were unable to repay loans accumulated during former president Slobodan Milosevic's rule. The decision led to the layoff of more than 8,500 employees.

Milosevic's Socialist Party, now in opposition, immediately issued a statement condemning the shutdown and accusing the government of "systematically destroying the entire banking system."

Since the government decision on 3 January, more than 100 bank employees have barricaded themselves inside their offices, demanding the government find ways to restructure the institutions rather than close them down.

The Union of Serbian Financial Organizations is negotiating new positions for the bank employees. Union representative Slobodan Mihaliovic says he hopes the workers will have guaranteed jobs.

"We will try in our negotiations with the government to obtain some guarantees that workers from those banks will be in a position to have a prime status in future jobs [with] new banks, [and] also in other banks which are still working," Mihaliovic says.

The closures are part of a package of economic reforms initiated by the democratic leadership that came to power after Milosevic's ouster in October 2000. Yugoslavia's authorities inherited an economy left in disarray by Milosevic's mismanagement, corruption, and four Balkan wars. The country faces a $12 billion foreign debt, an unemployment rate of 20 percent, and an annual inflation rate estimated at 50 percent.

The banks -- Beobanka, Investbanka, Jugobanka, and Beogradska Banka -- had provided credit to state companies that generated losses and failed to repay loans during communist rule and Milosevic's 13-year tenure.

The banks' accumulated debt amounted to more than $1 billion and was considered too exorbitant for the government to cover.

Personal and company savings accounts from the closed banks will be transferred to a nationwide postal savings system.

National Bank Deputy Governor Radovan Jelasic was part of a seven-member board that made the final decision to close the banks. He says the banks should have been shut down years ago: "These banks should have been closed -- not yesterday, and not the day before yesterday, but at least 10 or 20 years ago -- because none of these banks was functioning based on market principles. They were all politically motivated banks that basically served as an additional department for the Ministry of Finance in order to solve different problems in the social, political, [and] regional [realms]."

Jelasic says the closures have been over-politicized because the banks employed 40 percent of people working in the banking sector and represented some 70 percent of Serbia's banking assets. But Jelasic clarifies that, in terms of real numbers, the banks had almost no financial assets.

"These banks have basically only 35 million Deutschemarks, so basically about $16 [million] or $17 million of the money of private individuals and only about $50 million of legal entities. So based on this, these were really very small banks," Jelasic says. "In addition to that, these banks represented only about 10 percent of the total payment transactions in the country. So, if you look at sheer numbers -- big banks. But if you look at reality, if you look at the negative cash flow of these banks, these banks were really very small banks. The only issue was, 'Who will close this agony?' We took the courage, and we did it."

Jelasic says restructuring the banking sector is an important first step in building a new economy for Yugoslavia. He says the next target of the government in the coming year will be putting pressure on state-run companies.

"I think it enlarges the pressure on the real sector because once you close the banks, all the loans are due. So basically, by closing these banks, we are putting more pressure on the real sector companies," Jelasic says. "Now they have to sit down with a liquidation and bankruptcy manager and try to convince them what is the timeframe and what are the conditions under which they will be able to pay back the loans."

Michael Taylor of The Economist Intelligence Unit says the Yugoslav government had been preparing for the bank closures for about a year. He says officials were under pressure from the World Bank and the International Monetary Fund (IMF) to show they were serious about economic reforms in the country.

"The World Bank and the IMF have both made it clear that the banking sector is ripe for reform in Yugoslavia. [Much] of it [is not] functional, particularly in the case of these four banks. So they've got to clear deadwood out of the way and make room for new banks, probably foreign banks coming in, in many cases. They will have more public confidence," Taylor says. "Part of the problem in the banking system is there's a widespread failure of confidence among the population in the Balkans generally and in Yugoslavia."

Taylor believes the public protests from bank employees will die down in the next few days. He predicts the public will see these so-called "radical" moves as positive steps forward for Yugoslavia's economic future.

"[The government is] more radical because there is a feeling among some people that they don't have a lot of time. The effect of Milosevic's period in power effectively was to delay any transition while the rest of Eastern Europe was trying to join the rest of the world from about 1990 to 1991 onwards. Yugoslavia withdrew from that process and stayed in a little lager [camp] of its own," Taylor says. "It wasn't until the year 2001 they were to join the process of everyone else. So there's a feeling that they need to get a move on. They can't sit around as some of the countries have done in the Eastern Europe transition process. There's always this argument, which is probably now dead, of whether shock therapy is better than a gradualist approach. But I think [the Yugoslav government], at the price of anything, is going to go for shock therapy."

Taylor says that if Yugoslavia is to move forward and join the rest of Europe, the government will have to continue making radical moves against inefficient economic institutions. He says stalling on actions such as closing the state-run banks is just "prolonging the agony."

(AP contributed to this story.)