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 
 
 
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SUMMARY 
 
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¶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 
 
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¶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