Although recent financial events in the US suggest that stock markets sometimes fall even if a rate cut is not sufficiently low to meet the expectations, the BELEX is enjoying a short-term rebound thanks to the rise in interest rates that has staved off a serious meltdown in the value of Serbia's currency that would have triggered a collapse in corporate net worth as measured by the stock market index.

Market does not react to recognition of Kosovo separatists indicating it anticipated the outcome.

As many households, individuals and corporations have borrowed heavily in foreign currencies across this European periphery, the fear is that the borrowed debt will become hard to repay if their domestic currency loses too much in value.

The financial premise behind these rate increases is to provide an incentive for holders of Euros to deposit their holdings in these countries where rates are higher. By doing so, the Euro-holders would have to use their Euros to first buy the domestic currency and this incentive to buy, these central banks hope, is what will prop up their fledgling currency.

Some analysts, however, believe that rate increases in Serbia will have very little of this hoped for financial effect because the country is plagued by severe political uncertainty not only as to who runs the country but whether, once elections are over, Serbia will expand its financial ties with the sources of capital in the EU.

"Unfortunately, rate hikes have no impact on the dinar and the interbank market for the time being," a treasury analyst said. "Under the circumstances, I'm not sure if foreigners would come even if the rate was 20 percent."

Suggestive of this reluctance is central bank's covert intervention in the currency markets where it went on a Euro spending spree using it to buy its own currency.

Some estimate that the central bank spent up to 200 million Euros in just few weeks to buy its own paper and at that rate, assuming it is constant, it could cost the central bank about 1.6 billion Euros annually just to prevent its own currency from falling more then 5% in value.

With reserves of about 14 billion Euros, the 1.6 billion estimate represents about 11% of central bank's reserves just to offset a 5% decline in the value of Serbia's currency, the Dinar. With a small export base and huge appetite for imports, Serbia is bearing a disproportionate cost on trading paper in time when the spent money is needed to finance the cost of imports.

"Serbia has entered 2008 with big problems in maintaining the macroeconomic stability, as well as big foreign trade deficit and that of current payments, so the foreign investments and favorable credits from abroad are necessary to close that cycle," notes Jurij Bajec from the Belgrade Faculty of Economy.

Serbia's political uncertainty has placed both the foreign direct investment and favorable credits in jeopardy.

The inflow of foreign direct investment has dried up in the first 3 months of this year throwing the projected foreign investment inflow target of 3 billion Euros for 2008 out of the window.

Moreover, international credit agency, Standard & Poor's, has lowered Serbia short term credit rating to B citing political uncertainty that a government may be elected that will halt economic reforms and pull out of EU membership talks which "would lead to a lowering of the sovereign ratings for Serbia, as would a further rise of external imbalances, a budgetary blow-out, or significant slippage in economic reforms".

Anything below a BBB rating on Standard & Poor's is considered junk and a decrease in creditworthiness costs the country more in interest charges.

With over 50% of Serbia's corporate debt due by 2010, the decrease in creditworthiness makes refinancing such debt more costly.

Although Serbia's overall - 37% of GDP - corporate debt is considered in line with other developing countries, over 80% of that corporate debt is in Euros.

Known in the economic parlance as the "liability euroization", the foreign currency debt over-leverage has a disproportionately pronounced effect on corporate net worth in circumstances of a depreciating domestic currency.

For example, a 10% currency depreciation would raise Serbia's corporate financial obligations by 8% and shave off about 4% of Serbia's corporate net worth. However, at a 50% currency depreciation, not inconcievable if talks with EU collapse, the debt rises by 40% and corporate net worth shrinks by 25%.

Serbia's central bank has raised rates 3 times so far this year in order to prop up the domestic currency and stave off a melt down in the corporate net worth and some fear that frequent rate increases may spread panic in Serbia's market and exacerbate the already mounting woes.

Anticipating these mounting woes, Serbia's stock market, as measured by the BELEX15 index, has shaved off over 45% of its value since reaching its peak in April of 2007. On March 13, after central bank's intervention in the currency markets, the index bounced off the critical 1500 level that some consider a level of support for the Index.

Discounted by some because it relies on interpretation of price patterns, some stock market technical analysts suggest that the bear market trend line and the support line of the BELEX index should converge sometimes between June and September of this year marking that time a highly significant period for resolution of the economic events in Serbia: the country will either rebound from that floor or sink.

Line 2 and Line 3 are considered as trading ranges for the BELEX index.

Nor can Serbia's economy count on any significant positive stimulus from the consumers, themselves plagued by euroization.

Virtually non existent in 2002, Serbia's household credit has grown to 22% of GDP and is being fueled by cut-throat banking competition, 70% dominated by foreign banks with access to Euros. As a result, about 80% of household loans are Euro-denominated.

While not a lot of people borrowed, because of a fierce competition for market share between banks, some question the quality of loans that are on the books. About 20% of these loans are considered risky and are classified, in the financial rating parlance, as C through E paper. The best quality is the A rating and any other letter represents a sub-prime loan, a source of much of the contemporary financial problems in the US that are spreading across the globe.

Countries in the shaded area have lots of debt denominated in Euros. Darker the shade, more people borrowed.

Although statistics on property prices in Serbia are scant, anecdotal evidence suggests that Serbia's property market is in an advanced stage of a bubble with media outlets increasingly noting that another surprising new high in property prices has been reached in cities such the capital of Belgrade, Novi Sad, Nis and elsewhere.

On the face of it, with 27% of all loans being mortgages, Serbia does not look overly vulnerable to the property melt down but should property prices grind to a halt or turn negative as in the US, many property holders may suddenly find themselves with a loan amount that exceed the value of the property. What's worse, should Serbia's currency significantly fall in value, not only will the cost of the mortgage balloon, but the value of the asset will correspondingly shrink.

Shrinking asset value, or a reduction in available collateral, reduces ability of banks to lend money, and in a country such as Serbia where economic growth is debt-finaced, constraints on bank lending have significant impact on economic growth.

According to an IMF study of the household sector, a 25% depreciation in Serbia's currency could wipe out about 5% in available collateral for the banks. Perhaps not significant, notes IMF, but sufficient to "constrain banks’ ability to extent new credit, aggravating rollover and interest rate risks."

To mitigate currency risks that can adversely affect the corporate and the consumer sector of Serbia's economy, an influx of foreign direct investment is the key and observers equate this need with ascendancy into EU.

"Membership of the European Union is an umbrella that makes investors more sanguine about putting money into Central and Eastern Europe," says Neil Shearing, emerging-Europe economist at Capital Economics in London.

With the electorate in Serbia extremely disgusted with the EU because, by supporting Kosovo's islamic separatists, it presided over a forced break up of their country, re-establishing ties with the EU may be more of a financial necessity for Serbia rather then any genuine political sympathy that Serbian electorate may have for the EU given what Brussels has done to the country.

Well aware of this, Brussels has dispatched a Polish liberal MEP and the head of the Committee For Foreign Affairs of the European Parliament to Serbia in order to outline the stark choice that is ahead for the electorate in Serbia: either join EU and save your country from financial ruin or face a collapse - economic and, in all likelihood, territorial as well.