Identifier
Created
Classification
Origin
08PODGORICA279
2008-11-07 19:39:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Podgorica
Cable title:  

MONTENEGRO WEATHERING THE GLOBAL FINANCIAL STORM

Tags:  EFIN EINV ECON PREL MW 
pdf how-to read a cable
VZCZCXRO6139
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHPOD #0279/01 3121939
ZNR UUUUU ZZH
P R 071939Z NOV 08
FM AMEMBASSY PODGORICA
TO RUEHC/SECSTATE WASHDC PRIORITY 1018
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHPOD/AMEMBASSY PODGORICA 1106
UNCLAS SECTION 01 OF 03 PODGORICA 000279 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EINV ECON PREL MW
SUBJECT: MONTENEGRO WEATHERING THE GLOBAL FINANCIAL STORM

REF: PODGORICA 200

PODGORICA 00000279 001.2 OF 003


-------

SUMMARY

-------



UNCLAS SECTION 01 OF 03 PODGORICA 000279

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EINV ECON PREL MW
SUBJECT: MONTENEGRO WEATHERING THE GLOBAL FINANCIAL STORM

REF: PODGORICA 200

PODGORICA 00000279 001.2 OF 003


--------------

SUMMARY

--------------




1. (SBU) Montenegro's banks have been fairly insulated from the
global financial crisis by their conservative banking practices.
Foreign banks face a rockier future, but in general the small
size of the sector and absence of investment banks has provided
a cushion. In addition, the government has put in place
unlimited guarantees on deposits and now can serve as guarantor
of inter-banking credits, or can offer loans for banks to retain
liquidity. It can also, if necessary, inject additional capital
to shore up balance sheets. The greatest risk to the Montenegrin
economy lies in the longer-term effects of the crisis,
particularly as it is dependent on foreign direct investment to
support continued economic growth. Furthermore, the real estate
and tourism sectors - two key sectors in the Montenegrin economy
- could be affected by slackening global demand. Local experts,
however, note better than expected GDP growth in 2008. While
seven percent was projected, there has been eight percent growth
in the first nine months of the year already. The overall the
Montenegrin economy appears likely to weather the crisis, at
least in the near term. End summary.





New Law Adopted to Protect Financial Sector

--------------




2. (SBU) The new Banking Sector Protection Law was adopted by
the parliament on October 22. According to Finance Minister Igor
Luksic, the law was designed as preventative measure against the
global financial crisis as he believes that the banks in
Montenegro are currently stable and secure. Luksic said that the
law guarantees all deposits of citizens and companies. According
to the new law, the state also would guarantee inter-bank
credits and will be able to provide loans for banks in order to
preserve their liquidity, as well as to conduct capital
increases for certain banks. Interestingly, Luksic claims that
all deposits will be guaranteed, with no FDIC-type limit. The
GoM does have access to roughly half a billion euros, which many
experts speculate would be enough to keep the banking system
afloat in any foreseeable crisis, but we assess (as do our

European colleagues) that no real thought has gone into the
potential long-term impact on the economy if Montenegrin banks
were to suffer from a serious liquidity crisis and have to tap
into this guarantee. With the adoption of the law safeguards are
in place, but Montenegrin officials continue to assert that the
banking system is quite healthy and that there will be no need
for any serious intervention.


3. (SBU) Montenegro uses the Euro as its official currency
(since 2002),but does not belong to the Euro zone. Use of the
Euro defines the role of the Central Bank; since its authority
is limited, it focuses primarily on controlling the banking
system, and maintenance of the payment system. It acts as the
state fiscal agent, monitors monetary policy, and acts as a
control on the banking sector. The Central Bank adopted a set
of measures late last year designed to slow down the credit
growth and contribute to the transparency of the banking sector.
It prevented local banks from extending riskier credit, which
may be another reason that the sector seems to be weathering the
storm.



Current Crisis Opens Old Wounds

--------------




3. (U) In 1990 Dafiment bank was established in Yugoslavia. The
bank offered monthly interest of up to 15 percent on deposits in
dollars or marks. At the time, average monthly salaries equated
to roughly twenty dollars a month (Yugoslavia still used
Dinars),so with USD 1,000 in the bank, people could earn USD
150 a month in interest. This money made a significant
difference in everyday lives when exchanged for Dinars at the
spiraling black-market rate, so a significant amount of teh
population jumped at the Dafiment bank offer and moved their
entire savings to the bank. In 1993 Dafiment went bankrupt and

PODGORICA 00000279 002.2 OF 003


those who had invested their life savings lost everything. These
people are still waiting for their money to be refunded by the
Governments in Belgrade and Podgorica. (Note: Though Dafiment
was a private bank, because the effects of its collapse were so
dramatic, the Government of Montenegro has allocated 20 million
Euros to return the original deposit amounts to Montenegrin
citizens, which will be distributed over the next ten years. End
note.) For years following the Dafiment collapse, the banking
sector saw very few deposits as people no longer trusted the
banking system.

4 (U) During the last few years, Montenegro has experienced a
stabilization of the banking sector, along with a gradual
development of the capital market, thereby restoring consumer
confidence in banks. Foreign banks entered the Montenegrin
market during the privatization of the sector (completed in
2006),competition has increased, electronic banking has been
introduced, savings have increased, and customer credits have
been established. As one banker explained to local press, the
influence of the global financial crisis will be felt through
the increased unease among clients, especially those who had bad
experiences with their bank deposits in the 1990s.



Business as Usual, While Preparing for the Worst

-------------- ---




5. (SBU) Representatives of Montenegrin banks have claimed
publicly that the banks are working normally, though the global
financial crisis has influenced the growth of reference interest
rates and accessibility for long-term sources of financing. Some
bank representatives, however, have told us privately that they
are somewhat concerned about developments over the past month.
They all assess that the worst outcome would be a confidence
scare and subsequent run on the banks. To this end, they all
agree the GoM deposit guarantee measure has served as a positive
indicator to citizens that everything is okay and should boost
confidence in sector. One bank CEO, however, opined that GoM
strategy was just a time saver. He went on to say that the GoM
is just crossing their fingers the global crisis will start to
turn around before Montenegro becomes more involved.

Looming Liquidity Crisis?

--------------


6. (SBU) One bank CEO told us that while the country is not yet
seeing a run on banks, there has been an increase in deposit
outflows. To quote another banker, "more and more people are
hiding money under beds and in safety deposit boxes." Two banks
already have reportedly slipped into their mandatory reserves
and another bank worries that it could be there within weeks.
The sector, however, has remained quiet enough about the looming
liquidity problem that it appears to be holding steady for now.
We were beginning to see unusual lines at a handful of banks
last week, but this week all banks seem to be operating
normally. Senior GoM officials also have been working to
maintain confidence in the markets with President Filip
Vujanovic, Prime Minister Milo Djukanovic, and Deputy Prime
Minister for Economic Policy Vujica Lazovic all joining Luksic
in speaking out publicly to reassure the populace. And in one
positive note, term deposits (one year CDs are most common) have
remained steady, indicating a reasonable amount of trust in the
long-term viability of the sector.

Interest Rates Up, No One Lending

--------------


7. (SBU) The absence of a true investment banking sector in
Montenegro and the fact that all approved credits to companies
and citizens are backed by property as collateral, a crisis of
the nature seen in the U.S. and Western Europe is extremely
unlikely in Montenegro. The bigger concern is the increasing
inability for citizens or companies to get credit. Most local
banks increased interest rates in early October and experts say
that it is already impossible to get a loan at any rate. The
lack of trust shown in global financial markets during the last
month, as well as reported losses of large banks, have
influenced the growth of reference interest rates and hurt the
accessibility of long-term financing sources in the form of
inter-banking credit lines on capital markets. Because of this,
sources of financing -- especially those connected with the
international capital markets -- are much less accessible and
thus much more expensive.


8. (SBU) In a country reliant on a burgeoning entrepreneurial
class and a steady flow of foreign investment for its economic

PODGORICA 00000279 003.2 OF 003


growth, the high interest rates and a shrinking credit are
significant concern. This week, PM Djukanovic, viewed as
extremely focused on growing the economy and increasing foreign
investment, finally spoke out about the crisis. According to
the PM, although it will be increasingly difficult given the
situation facing many global investors, the most important task
of the GoM during the next year will be to create conditions for
further development of investments. His words should shore up
confidence in the financial sector.



Prva Banka: First to Show Signs of Collapse

--------------




8. (SBU) On October 22 the Central Bank implemented measures to
prevent potential problems in Prva Banka (First Bank),which was
starting to show signs of a liquidity crisis. A temporary halt
has been put on Prva's asset increases, except in cases which
could strengthen the bank's liquidity (i.e. collecting
deposits),and currently Prva is prohibited from trading on the
capital market as well. Experts assess that the bank's
liquidity problem is a result of rapid and uncontrolled growth
of deposits, credits, and investments. (Note: Prva Banka's
assets in June 2006 were 29 million Euros and grew to 546
million in 2008, leaving many to speculate how one bank in a
small country could grow so much, so fast. End note.) It is
expected that the measures introduced by the Central Bank will
stymie short-term consequences for customers, but only
partnership with a foreign investor will solve the bank's
problems in the long term. Prva, however, had been showing signs
of trouble for over a year now according to experts, so a
serious crisis there -- though that appears to have been averted
for now -- would not signal a sector-wide crisis that the
failure of another bank might.



COMMENT

--------------




9. (SBU) Local experts and foreign diplomats in Podgorica
surmise that Montenegro may well avoid being dragged down by the
global crisis. As Deputy PM Lazovic told local press, "the
country's GDP growth indicates an upward trend in the
Montenegrin economy at a time when many countries are reviewing
their growth projections." There is some nervousness about a
real estate bubble here which also could be at risk or that the
tourism sector - on which the economy is so dependant - could
suffer from a global downturn. However, with prominent
political leaders continuing to reassure the public, a
full-blown crisis of confidence in the sector should be
avoidable.
KONTOS