Montenegro, as a country that does not have its own monetary policy, must urgently react with fiscal policy instruments in order to improve its credibility on the international financial market and preserve economic stability, according to the Center for Economic and European Studies (CEES).
“Therefore, the new Government, after the parliamentary elections, must urgently prepare a credible medium-term fiscal strategy, which would restore the confidence of foreign investors in the public finances of Montenegro.” To a certain extent, this would contribute to more favorable financing conditions for the budget, the economy and citizens,” CEES told the Mina-business agency.
CEES, commenting on the collapse of two American banks and the problems faced by the Swiss Credit Suisse, as well as the possible implications for Montenegro, said that the European Central Bank (ECB) has again increased the base interest rate by 0.5 percent. Points, because inflation is not falling in line with expectations.
“The above will have an impact on the possible increase of interest rates in Montenegro as a euroized economy, which already happened when the ECB increased the basic interest rate last year,” they reminded from CEES.
As they stated, the announcements of a further increase in interest rates in the United States of America (USA) could be corrected, given that the rise in interest rates is one of the reasons for the recent closure of Silicon Valley Bank (SVB) and Signature Bank.
“These were not systemically important banks, and the reaction of the American authorities in guaranteeing the safety of the deposits of American citizens was excellent, in order to prevent the domino effect. The decline in the value of the shares of one of the world’s largest and systemically important banks – the Swiss Credite Suisse – affected the need for it to borrow money from the Swiss central bank. Nevertheless, despite this, Credit Suisse shares are falling, and all European stock market indices, as well as oil prices, have also fallen. Credit agencies have put several more European banks on watch,” CEES explained.
CEES believes that the situation on the international financial market can have an impact on the real sector throughout Europe.
“The current development of events will make borrowing opportunities and conditions more difficult for small and vulnerable economies with a high fiscal deficit and public debt, such as Montenegro,” announced CEES.
As they added, bond prices on the international market are currently rising, but Montenegrin bonds are stagnating and are offered at around 80 percent of their nominal value.
“The very expensive borrowing of Montenegro was also confirmed through the recent credit arrangement of the Ministry of Finance with Deutsche Bank, with an effective interest rate of ten percent. The difficult borrowing possibilities of our country can be a big challenge for the regular payment of budget obligations, since the estimated debt for financing the missing budget funds for this year amounts to EUR 600 million”, CEES assessed.
As they claim, this can further adversely affect the overall economic activity, because state consumption contributes about 20 percent to the formation of the gross domestic product (GDP), and the multiplier effects are also strong.
“In such a scenario, we do not rule out a recession either,” CEES warned.
Commenting on the possible domino effect on banks in Europe, due to the current collapse of several banks, CEES said that the closure of two medium-sized banks in the USA and the fall in the value of Credit Suisse’s shares were followed by a very good reaction of the monetary authorities in response to those challenges, and for now we cannot talk about a domino effect.
“Nevertheless, as we previously stated, Credit Suisse’s shares are still falling, and all European stock market indexes have fallen, as well as oil prices.” Credit agencies put several more European banks under scrutiny. All this points to the need for increased vigilance,” CEES added.
To the question of whether there is a fear of a banking crisis, which could shake the markets more than the financial one in 2008-2009, the CEES answered that the monetary authorities in the world, based on the experience of the great financial crisis, significantly improved the mechanisms of macroprudential policy, i.e. measures strengthening the stability of the financial sector.
Nevertheless, the existing challenges in the banking sector in the USA and Europe and movements in the financial markets indicate the need for even greater caution in conducting macroprudential policy and capitalization of banks.
“This applies to all countries, including Montenegro, which has a stable banking sector and a legal framework on credit institutions that is compliant with European directives.” In addition, a very important factor in further strengthening the stability of both the copper sector and the economy as a whole would be the urgent consolidation of public finances”, concluded CEES.