Foreign investors welcomed on Tuesday Serbia's arrest of war crimes fugitive Radovan Karadzic, seeing it as a key step towards European Union entry, but analysts said serious economic and political obstacles remain.
Serbia's dinar currency rose to a year high against the euro following the news late on Monday that the wartime Bosnian Serb leader had been caught after 11 years on the run. Belgrade's stock market also rallied 2.4 percent, with investors hoping the arrest would usher in more market-positive moves from the government.
"He has been a cloud hanging over the region," head of emerging European sovereigns for ratings agency Fitch Edward Parker told Reuters. "Foreign investors are looking for stability and so this should be seen as positive. It shows the pro-EU government in Serbia is different from its predecessors."
Formed after a close-run election earlier in the year, the new government is an odd-couple alliance of President Boris Tadic's pro-Western party and the Socialists of the late former president Slobodan Milosevic. Its success in arresting Karadzic was met with an immediate response from Brussels, with European Commission saying on Tuesday it would implement a trade benefits agreement as a result.
Foreign companies also gave the move a thumbs up. Tuesday saw the first announcements of new foreign direct investment in Serbia in months, with an Austrian firm starting a motor-powered glider tourism venture in a rural Serbia and a German firm announcing a major hotel purchase.
Financial markets greeted the news with a significant repricing of Serbian risk. The cost of insuring Serbia's debt through the credit default swaps market fell some 19 basis points to 247 basis points - meaning it would cost $247,000 to ensure $10 million of Serbian debt.
"This is a surprise that it has happened so fast," said Commerzbank strategist Barbara Nestor. But Nestor warned that Serbia, along with Romania, remained one of the most exposed European economies to global financial crisis and its fallout. "The economic issues remain a big deal," she said.