The government of Montenegro on Thursday signed a “hedge” agreement with three Western banks to protect the currency risk of the large Chinese loan taken out to finance a major highway.

The Chinese loan for the first phase of the Bar-Boljare highway has placed a heavy burden on Montenegro’s public finances.

Finance and Social Affairs Minister Milojko Spajic said an agreement had been reached with two anonymous US banks and one from France, converting the loan from US dollars to euros.

The ministry told BIRN on Friday that the deal means that the dollar loan Montenegro has taken from China’s Exim bank is expected to be partially or fully converted to euros, while three other banks will take on any potential currency risk. .

“The deal virtually reduced the interest rate on debt owed to the Chinese Exim Bank from 2% to 0.8%,” Spajic told media. “On this basis, we will save 8 million euros per year,” he added.

The Bar-Boljare section represents the Montenegrin section of a highway that will connect its Adriatic coast to the Serbian capital, Belgrade. The Montenegrin leg is built by the China Road and Bridge Corporation, CRBC. The first section is 85 percent funded by a $ 944 million loan from the Exim Bank.

According to state data from December 2020, Montenegro’s public debt was then equal to 90.85% of GDP, while the cost of the first phase of 41 kilometers of the highway alone was estimated at 45%. of GDP.

The Ministry of Finance and Social Affairs warned that due to the earlier failure to convert debt from dollars to euros, Montenegro had lost some 109 million euros.

The U.S. Embassy in Montenegro hailed the deal, saying it will further ensure Montenegro’s financial stability, while U.S. Special Representative for the Western Balkans Matthew Palmer urged caution in trade deals with China at a meeting with Spajic.

“American officials should be reminded to only deal with affairs between the United States and Montenegro during their visits, and to worry less about the friendly relations between China and Montenegro,” the embassy replied. from China to Podgorica on Twitter.

In its September 2019 report, the IMF urged Montenegro to reduce the risk of exchange rate fluctuations for its loan repayments.

In February 2020, the former government, led by Milo Djukanovic’s Democratic Socialist Party, DPS, said it was negotiating with seven banks over currency risk protection on the highway loan.

On April 15, the new government announced its intention to negotiate with the European Union to repay China’s nearly $ 1 billion loan, saying it was looking for ways to finance its biggest infrastructure project. in better conditions.

On March 18, Deputy Prime Minister Dritan Abazovic called on the EU to help Montenegro replace debt owed to the Exim bank with a loan from a European bank, but the European Commission said the EU no would not help Montenegro repay its loan, even if it sympathized with the goal of reducing dependence on China.

On July 7, Economic Development Minister Jakov Milatovic said Montenegro was weeks away from concluding an agreement to swap or refinance with European and American banks. “There are two options: the first is to refinance, the second is to swap the loan, or the third option is to do part of the first and part of the second,” Milatovic told Reuters.