Montenegro agrees hedging deals to ease Chinese debt burden -report

© Reuters. FILE PHOTO: A general view of Budva, the main summer tourist destination heavily affected by coronavirus disease (COVID-19), Montenegro, August 8, 2020. REUTERS/Stevo Vasiljevic

BELGRADE (Reuters) - Montenegro has secured a deal with four international banks to hedge its foreign exchange risk on nearly $1 billion of debt owed to China, the Mina state news agency reported on Wednesday, citing finance minister Milojko Spajic.

The hedges will also reduce the interest rate it pays on the debt, the report said.

Economy Minister Jakov Milatovic had told Reuters earlier this month that Montenegro was close to securing a deal to either swap or refinance the debt and hoped to reduce the interest rate to below 1%.

The Adriatic country of 620,000 people borrowed $944 million from China in 2014 to fund a 41 km (25 mile) stretch of a highway which, once completed, should link its main port of Bar with neighbouring, landlocked Serbia.

Montenegro secured 14-year hedging deals with France's Societe Generale (OTC:SCGLY), Germany's Deutsche Bank (DE:DBKGn), and U.S.-based Merrill Lynch International and Goldman Sachs (NYSE:GS) International, the report said.

It quoted Spajic as saying: "We have secured ... Montenegro's public debt from the currency risk that has been a noose around the state's neck."

Montenegro will pay an interest rate in euros of 0.88% rather than 2% it had been paying in U.S. dollars, the report said, which will help the European Union candidate country reduce its public debt of around 103% of economic output.

The finance ministry could not be immediately reached for comment.

The loan from the Export-Import Bank of China was taken out in 2014 with a six-year grace period and a 14-year additional maturity. The principal is already starting to be paid off.

The report also quoted Spajic as saying Montenegro would continue to continue to negotiate "with European partners" which he did not identify, on how to refinance the highway loan.

"This (hedging) was an intermediate step towards refinancing," he said.

Montenegro's economy shrank 15% in 2020, one of the sharpest contractions in Europe, as the COVID-19 pandemic cut off tourism, its main source of revenue. The government sees 2021 economic growth of 10.5%, followed by 6-7% in 2022.