BELGRADE, Jan 26 (Reuters) - Serbia's government is mulling buying back U.S. Steel Corp's underperforming Serbian unit, a senior government official said, potentially averting huge job losses but straining the budget of the struggling Balkan country.
U.S. Steel bought the bankrupt steel mill in 2003 for $33 million in one of the first major privatisation deals after the fall of strongman Slobodan Milosevic in 2000, but it has been running well below annual capacity of 2.4 million tonnes for the past five years.
The government, facing an election by May, is battling to avert the closure of the country's biggest exporter and workplace for more than 5,000 people in the central city of Smederevo. Official unemployment in Serbia stands at 23.7 percent.
The government's finance state secretary, Dusan Nikezic, said the buyback was among several options being considered.
"It is one of the options," he told Serbian television B92 late on Wednesday, adding: "If that happens the government has no intention of running the mill long-term, but will seek a strategic partner."
In a note on Wednesday, responding to unconfirmed media reports, Fitch Ratings warned the cost of the buyback would likely cause Serbia to miss this year's IMF-agreed deficit target by a larger margin than already expected.
Serbia's target budget deficit is 4.25 percent.
The International Monetary Fund (IMF) has already postponed its first review of a 1 billion euro ($1.3 billion) standby deal with Serbia, saying the country's 2012 budget did not meet the terms of the deal.
"A significant deviation from the fiscal deficit targets set under Serbia's fiscal rule, which seeks to cap the debt to GDP ratio at 45 percent, would put upward pressure on public debt ratios and therefore be negative for the rating," Fitch cautioned.
Fitch currently rates Serbia at BB- with stable outlook.
In October last year, U.S. Steel announced its steel-making plants in Slovakia and Serbia had accumulated a combined loss of $50 million in the first three quarters of 2011.
It put the majority of its workforce at the Serbian unit this month on a four-day working week to cut costs, having idled one its two blast furnaces last year.
The government this week formed a special working group to find a solution for the plant, worth about $35 million in exports in 2010.
A government official, speaking on condition of anonymity, said Serbia had few feasible options to save the plant.
"We have limited fiscal resources or options for borrowing, and a problem with the IMF standby deal and elections," he said.
"We can try to find a strategic partner, but we need it to do it cheaply and quickly," the official said.