Croatia: How Government’s Kicking the Can Along Economic Junk Road

kicking the can

Croatia’s credit rating is on the junk heap. This will affect all facets of the economy and place growth onto a wish-list, rather than on the done-list.

Rating agency Standard & Poor’s on Friday 14 December lowered Croatia into junk status to BB-plus from BBB-minus, concluding that the recent government reforms will not be enough to boost the economy.

Oh what a tangled web Croatia’s Cock-a-doodle-doo coalition government weaves as it spends the money it doesn’t have.

Oh what a tangled web Croatia’s Cock-a-doodle-doo coalition government weaves as it’s Prime Minister Zoran Milanovic stamps his feet, shouting: ratings are not important … one rating agency says one thing and another says something entirely different three months later … have we done anything scandalous during the last three months to deserved reduction in rating … no we haven’t…we will sort it out ourselves … we don’t need the IMF (International Monetary Fund) … government does not save … government takes out loans … all countries take out loans … we will borrow more money … we won’t lower the wages … we won’t reduce the numbers of workers paid from the public purse (source: Prime Minister Zoran Milanovic on Croatian HRT TV news 16th December 2012).

Well, it’s true nothing scandalous, or otherwise, has been done by Milanovic’s government in the past three months. It is precisely that inactivity that has earned the junk status for Croatia’s credit rating and Milanovic simply does not seem to see that.

Déjà vu overpowers me. I’ve heard this before. Croatians have lived this before. When Tito ruled over Communist Yugoslavia. Anything – even the rigid and productivity based unsustainable job security – to keep people believing the “party” is keeping the individual afloat, while the economy’s flushing down the toilet!

The question that must be asked: Why isn’t the Croatian government prepared to implement painful changes/cuts to its public expenditure, introduce real and meaningful incentives for private business enterprise that will benefit all in the long run? The answer could well lie in its fear that it will lose votes at the next elections if it cuts public expenditure/public jobs.

It’s about votes; bugger the consequences for “Joe Bloggs” down the street.

Standard & Poor wrote: “In our opinion, the Croatian government’s reforms have so far been insufficient to eliminate the structural rigidities that hamper the country’s growth potential… We believe that the government’s fiscal resolve has weakened, leaving structural budgetary weaknesses, such as high personnel and social expenditures, which together make up just under three quarters of central  government spending, unaddressed. The outlook is stable, reflecting our view that Croatia’s wealth levels, relatively diversified economy, and future receipt of EU funds could help stabilize external imbalances and government finances while improving  growth prospects.”

Milanovic crows about borrowing more money. He talks of other countries that are doing the same as if that’s very fine and O.K.
Well, it’s not OK.
It’s not O.K. to drown along with others.

The issue of debt won’t go away by borrowing more money.  The more you borrow the more you must return. The issue won’t go away until the debts are liquidated. New loans are most likely going to prop up banks’ balance sheets or, God save the people from this one: more government bonds. Most likely nothing will go towards extending loans to businesses or households and getting out of the economic rut.

If the Croatia Bank for Reconstruction and Development (HBOR), headed by Anton Kovacev, appalling track record in instigating and supporting changes to and development of new private business enterprise is anything to go by, then Croatia is likely to stay on the junk heap for some time to come. HBOR has, according to Croatian HRT TV news December 17, also been placed onto the junk pile of economic performance/credit rating.

Finance minister Slavko Linic said December 17 that the government will be borrowing but the borrowing would mostly be internally, rather than externally. Kind of keep-things-local approach.

Next year will not pose any problems with borrowing and the Croatian government can take out loans to the value of HRK 28 billion which are equal to its dues, with most of these being taken on the domestic market, and we will not release government bonds in the first quarter because there is no need for us to crash the value of our bonds on the foreign market and there is also no need to take out a loan with the International Monetary Fund (IMF),” Finance Minister Slavko Linic said on Monday 17 December.

To throw a spanner into the government’s works, the Croatian National Bank governor Boris Vujcic holds that dependence upon domestic borrowing is not a good plan to recovery and economic growth. Vujcic states that in such circumstances interest rates would grow and it’d push out private borrowing – and that would result in a further ratings fall.

With HBOR’s poor rating and performance and Croatian National Bank (HNB) governor being at loggerheads with the government over the source of funds for government borrowing the real issues of desperately needed financial, public expenditure, private enterprise invigoration get lost and economic growth is in the can the government keeps kicking down the road. Decisions to implement real changes, get rid of structural rigidities, keep being delayed and the children of today will indeed bear the full burden when the government debt collectors start banging – not knocking – on the door.

If Milanovic was looking up to countries like Portugal, Spain, Greece … when he gave borrowing a thumbs up, then he’d better look again. One wouldn’t want Croatia to end up where these countries are heading – bankruptcy! Milanovic and his government have said several times over recently that foreign investment in Croatia hasn’t been coming as they thought it would. Of course it hasn’t – private investors look for security and flexibility that would allow decent profits and Milanovic’s government just hasn’t been delivering its part of the deal. They seem to be stuck in business operational rigidity, much of which corroded the economy of Communist Yugoslavia.

The reality is that national banking systems in Europe are having a hard time borrowing money from private investors and, hence, the European Central Bank (ECB) is becoming the lender of last resort. Perhaps ECB loan “terms and conditions” aren’t as rigid as those of the private sector and Milanovic might put on a pair of rosy-coloured glasses on his way to grab some ECB seemingly free money – if he sides with HNB governor rather than his Finance minister on the issue of borrowing, that is.

Don’t hold your breath for a better future on “free” or “easy” money terms ECB’s peddling.

Then Croatia (like Portugal or Greece) will become overborrowed, have an even smaller chance of growing the economy. Finance minister’s statement that new borrowings in 2013 will just be enough to service existing debt supports such dire consequences for the ever growing number of the unemployed and poverty stricken individuals!

Such government borrowing is, in reality,  a “rob Peter to pay Paul” self-inflicted predicament. What happens next?!

This is the biggest threat to the country and the people’s wealth and measures must be taken to protect the people and avoid utter misery. Such measures do not include inhaling solace, like Milanovic does, from comparing Croatia to other countries that borrow money.

Milanovic and his government are perhaps also marking time, kicking the can down the road, until EU funds start kicking in after 1 July 2013 (when Croatia is expected to become member of EU). That’s what Tito would do if he and the Communist Yugoslavia were still alive. Well, this just isn’t good enough. No EU fund will save the Croatian economy unless Croatia itself walks the hard yards and implements required changes to its public expenditure and vigorously stimulates sustained growth in small to medium private business enterprises. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

Comments

  1. Ina,
    Truth be told, it’s not often, if in fact ever, I agree with your – admittedly sincerely heartfelt – socio-political views on Croatia – they are frankly too far right of centre for my tastes – but as a financial journalist I really have to acknowledge that I can’t find much, if indeed any significant fault, with this trenchant analysis of the failings of the current government with regard to their (mis-) management of the country’s economy. Yes, the previous administration was pretty lame, to say the least, on the economic front, but the present administration makes them seem like Nobel prize winners in comparison with regard to their economic management (non-) skills. Your great translations into English of a lot of the local press coverage is a real boon to many non-Croatian speaking foreigners who love Croatia, regardless of the orientation of their political opinions, and like to follow developments in the country. Keep up the good work!

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    • Anthony, at the end of the day whether someone is conservative (right winged) or not (left winged) it does not really matter as long as the interests of the nation (people) are kept in check and good living standards and opportunities created and maintained. The problem seems to be in Croatia that both the right and the left and the centre of both side still hold politicians who want to keep their careers in politics and do not want to make real changes that are absolutely necessary for Croatia to survive in the modern and democratic world. The current left though is more destructive than the former right wing government. A sharp and hard turn away from “communist/socialist” traditions must be made. Soon!

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      • Frankly, I don’t care about Standard & Poor’s. They’re sh..heads as it is. But Croatian Government seems to be concerned only with destroying economy and selling anything they can, while maintaining their position.

        Public jobs also can be just as useful for economy as well-regulated private jobs (and far more than unregulated private jobs), but public must be smart enough to vote politicians who actually care about country in power. My impression so far is that Croatian politicians hate Croatia for breaking away from Yugoslavia and want to destroy it.

        Debt isn’t a problem as long as you can pay interests on it and gradually reduce it. But whatever money our Government borrows will be used for politicians’ own personal luxuries, and not for helping put economy back in the gear, meaning that one day we won’t be able to pay interest, even less pay off debt. What then follows is clear.

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  2. Michael silovic says:

    I will say it again that what has happened is that the powers that be are too focused in getting into the EU rather then focusing on our country and people. Knowing that getting into the EU will pump money into our coffers would help them next election cycle when they spread the wealth even though they know that in the long term they will do more harm then good.Economic investments do not require us to be a part of the Eu. what has happened here is the lack of vision for our country and to simply follow down the path that others before us have chosen which we all can see is disastrous. If we look as an example of our farming community and how it was ignored rather then help we have imported 10 billion dollars of various farming goods into our country in fruit, vegetable, eggs etc. and at the same time doing nothing to export our goods that we have as little as it may be. We should have invested in our own infrastructure to increase our exports to support our people and country. They have failed in this.There is so much that has been done wrong that we need new leadership that will put Croatia First. Building investments is not that hard to understand. Any investor / company will always will look at the taxable rate before anything else as tax rates conclude overall investment and returns.Look at why so many have moved to china and India. We have to invest in our own people and country with manufacturing and farming. Those two are the backbone of any nation building and if you do not have those two you will fail. A perfect example is the united states. Once the manufacturing country of the world in all areas. Once they sold out all of their manufacturing base the country went into decline. Now they are focusing on rebuilding that manufacturing base. The technology base can not and will not support any country alone. farming and manufacturing is the key that we need to focus on. borrowing money from the EU or the IMF is not the way to go in the long term

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    • Agree with most of what you say, especially in agriculture. But tax rates don’t explain China and India’s rise. There rise is driven primarily by exceptionally low wages and in some cases low wages combined with high skill and productivity.

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      • Sunman, I get what you mean re China and India, however, living standards and expectations of ordinary masses (there’s l;ots of them there) are much lower than in Croatia.

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    • Yep Michael, as you say: “what has happened here is the lack of vision for our country and to simply follow down the path that others before us have chosen which we all can see is disastrous”

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  3. This is a nightmare. Declining and aging population with increasing debt. And a government that is oblivious to it’s consequences. Lord help us.

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  4. Računovodstvo says:

    I’m a CPA of Croatian extraction who was disheartened to read about the downgrade into junk status. The problem with socialist governments are that they don’t have the money to keep employing most of its population and workers cannot be absorbed by a private sector because it doesn’t have enough jobs to do this. So, in one way austerity is not really the answer for economies that are currently on life support, but the current path of spending more than you take in has to stop.

    One of Croatia’s main issues that it desperately needs framework to build a vibrant private sector and the country clearly has the resources to create a strong one. Tourism, wine, agriculture, young highly educated people are at its fingertips, however, I think the country has a serious impediment because it’s going to have to think outside of the box it has lived in during Communism. I had a recent conversation with my cousin that showed, to me at least, that the mindset of the people has to expand. He was worried that Croatia would have to sell its islands to pay back the EU any money that the country is lent because he maintains that the country is not ready for this, which I happen to concur with his opinion. Even though selling islands is possible, I told him that it wasn’t probable because I just didn’t see Croatia handing over its land to pay back the EU, nor do I foresee the EU demanding this form of payment either. So, he asked what would be the solution and I countered back with the possibility of leasing islands. And that was where I lost him because he just didn’t see any business taking that route. Leasing is very common and can be very beneficial to both parties involved, but leasing occurs in countries where the rule of contract law is adhered to and not in a socialist legal system where the ownership of private and intellectual property was not respected. Interestingly enough, Greece has chosen to lease its islands and I believe that it’s been successful as I read that a real estate company plans on developing a golf course on of the islands.

    I sincerely hope the country decides to accept help from the IMF. Initially, I was surprised that the goverment rejected it but soon realized that means that the country would have to play by the IMF’s rules. I just don’t see how much longer can Croatia go at this alone. Due to my education, certification, and knowledge of the language and country, I have a dream of one day working as a consultant or as a go-between large corporations willing to invest in Croatia and the government. But after reading some of these recent developments, I just fear I would be banging my head against a wall with no real results. For a country who bemoans a shrinking population and a large diaspora, it seems like the government just doesn’t see the urgency in fixing some of these problems.

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    • You’re “on the money” Racunovodstvo. Croatian government simply must start thinking outside the communism box and forge ahead into reforms in private sector, boosting and supporting small and middle sized businesses etc. They are the backbone of every good and responsible economy.

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      • Računovodstvo says:

        I agree that small and medium sized businesses are an important component of an economy. One thing must be mentioned about being a small business owner: if you want to
        be successful, then you will work harder and longer than if you are an employee. For example, I emailed a company that rents villas on the island of Hvar inquiring about rates. I never received a reply and was disappointed as the company had a nice website. When I emailed a company in Paris to inquire about renting one of their flats, I got a response immediately to my request. Upon arrival, I was greeted by an employee who was very thorough and knowledgeable regarding the inner workings of the flat and I even received a gift for renting from the company. Now, that’s how you get business and attitudes need a little bit of tweaking because ignoring requests for pricing on your products or services is just not going to get Croatian businesses anywhere.

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      • Exactly, Racunovodstvo

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  5. Having spent some time in Croatia recently, and having see how difficult it is becoming to maintain a decent quality of life for the average citizen, this is absolutely saddening and anger-inducing too. I wish there was a means of firing the current government that can be done immediately, because when it comes to this issue, first thing is first: these incompetent fools, who show no common sense, no vision for a successful, strong Croatia, must have their positions of power taken away. They must never be allowed to snake their way in. Perhaps I am cynical, but it seems useless to talk about practical solutions for the country when it appears rather obvious that the very people who can start making tough decisions and bringing about change are unwilling to do anything potentially beneficial. (Of course, it’s more important they’re re-elected! Who cares how much damage they cause to everyday citizens, as long as they get what they feel they’re entitled to!)

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  1. […] into a European banking union given the potential risks. Meanwhile, Croatia, the War and the Future comments on that country’s recent downgrade by rating agency Standard and Poor’s to BB+, or junk status, […]

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