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Abstract

In Southeast Europe the use of foreign currency in general and euro in particular is widespreaded phenomen that is also referred as euroization. The term euroization referres to de facto or de iure use of the euro as legal tender, medium of exchange, unit of account and store value instead of the domestic (local) currency. There are several reasons for euroization, but the main is the erosion of confidence in national currency owing to the economic and political situation. The foreign currency (FX) indexation (valuation) clause is the stipulation in the contract (commercial or financial) that ties the nominal value of monethary obligation that has to be paid in one currency (currency of settlement) to another currency (currency of valuation). First currency is uslualy the domestic (weak) currency and the another currency is foreign (hard) currency, mainly U.S. dollar or euro. The inheret risks associated with FX indexed lending, and use of euro as unit of account for the loan obliagations, has been underestimated and neglected by banks an borrowers. The weakening of dinar against the euro led to significant increase of real costs of unhedged FX indexed borrowings and higher credit defalut risk for banks. The current high level of euroization in Srbia is also posing a severe challenge to active monethary policy. Therefore, de-euroization is essential prerequisite to improving the stability of the monethary and financial system in Serbia.

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