Sunday, February 7, 2010

Serbia On the Edge of Hyper-Inflation

In 2008, it took 80 Serbian dinars to buy one euro. On Friday the official exchange rate of the currency was 98.68 dinars for one euro.

The only reason the euro hasn't climbed above 100 dinars is because of heavy intervention in foreign exchange markets by Serbia's central bank. Reportedly the Serbian CB has sold over 250 million euro since January 1, in attempt to halt the dinar collapse.

It is unclear just how much the Serbian CB holds in foreign currency that could be used to further prop up the dinar. It is not likely to be a massive hoard.

The collapse of the dinar has an immediate impact throughout much of Serbia, as everyone from homeowners to businessmen have loans outstanding that are payable in euros. Thus the collapse of the dinar has an effect on all who must convert their depreciating dinars into euros to make their monthly loan payments.

1 comment:

  1. To say that Serbia is on the verge of hyperinflation is ludicrous.

    The Serbian government is willingly devaluing its currency to fight the relative debt increase in the last 2 years; for example, let's say that the internal debt is 80 million dinars. The government would borrow 1 million euros (at the time the relation was 1:80). However, as the internal debt rises, the government is not willing to borrow more; therefore, it devalues the currency, making the same 1 million € it borrowed worth over 20% more - circa 98 million dinars.

    As for the foreign reserves, I have slightly outdated data, but it's still useful: at the end of 2008, the foreign reserves amounted almost 10 billion EUR.