Well, the news is just rolling in off the wires this morning:

The International Monetary Fund and Serbia have agreed a 27-month, 3 billion euro programme to help the Balkan nation enforce the biggest spending cuts in years needed to anchor its weakening economy.

“Serbia’s GDP will almost certainly decline in 2009 … It looks more likely to be minus two percent. And we believe that growth in 2010 will be flat,” Albert Jaeger, IMF chief of mission, told a news conference.

He said the loan would probably be approved in early May and fiscal adjustment was the key tackling Serbia’s external and domestic financing gaps. The IMF said a fiscal gap of 3.0 percent of GDP was the maximum Serbia could finance, while a sharp fiscal adjustment, including a wage and pension freeze in 2009 and 2010, will help Serbia attain a more balanced external position.

What more can I say? The Eastern crisis is extending rapidly, more rapidly than we are deploying means to contain it. I don’t have time to go into this much more at this point, but I thought it might be worth reproducing a dialogue that went on over a mail thread this morning, between two people with a strong interest in what is happening in Serbia.

Mr A: I still don’t understand if this is a good news for Serbia…

Mr Z: No it is a terrible news, Basically as so far Serbia is unique in the way that now cannot apply either fiscal or monetary measures to kick off the recovery

Mr A: That’s my fear as well. And it is true, there is absolutely no space for fiscal or monetary measures. Moreover, I just got now an info that European Union accession funds for Serbia will not be distributed this year to NGOs/civil society projects/IDPs and refugees associations, but given directly to the government budget. Another sign that the situation here is really getting bleaker than I thought.

BTW, as Edward knows, I am not an economist and I am more interested in the social and political consequences of this crisis. In relation to Serbia, I am quite frightened. If the economic situation rapidly worsens, I will not be so surprised to see a serious political turmoil in Serbia… Hope I am wrong.

Mr A:Yeah, but you know people response is: “Crises, what crises? We have been in a crisis for last twenty years?”.

Politically I hope that there are some changes since the ruling coalition is very much a bizarre motley crew. The leading party in the coalition is the hostage of smaller parties crazy ideas. Unfortunately the same would apply for the leading opposition party – they too have too depend of forming coalitions with smaller “crazy” political parties.

Mr Z:Yep, I hear this story on a daily basis…

My question is anyway: what kind of consequences will possibly have the IMF loan on the Serbian economy?
– devaluation of the dinar?
– higher inflation?

Bizarre is the right adjective to describe the Serbian govt coalition. The problem is that unfortunately I don’t see any possible alternative. But that’s another topic 🙂

Mr A: Well, they will have to tackle competitiveness of the economy.

Basically an erosion of wages and depreciation of the currency.

It will not be pretty and particularly it will be hard in cities.

In conclusion, let’s just remember my little causal chain (with feedback loops, of course).

Financial Crisis -> Real Economy Crisis -> Political Crisis