Croatia: Personal Bankruptcy – A Looming Deluge Threatening The Economy

The latest figures released by Croatia’s justice minister Orsat Miljenic say that right now in Croatia there are some 317,000 citizens who have had their bank accounts blocked, preventing them from meeting their financial obligations as well as their everyday needs. Their private/household debt totals some 28 billion Kuna. To put a perspective on that sum it translates into almost 25% of the income/revenue feature of the state budget for 2014/2015! On average, ten families are deprived of their assets — most often their housing — each day as a result of enforcement proceedings.

Croatia has a quite effective legal framework for the enforcement of debt payments, but in six years of deep economic crisis no way has yet been found or asserted to incorporate a social component into the debt collection system. The institutions of personal bankruptcy and debt rescheduling for the over-indebted still do not exist, however public submissions for the draft Consumer Bankruptcy Bill have closed on 24 July 2014 and it is expected that it will make its way to the parliament as a matter of urgency. Scenes of implementing eviction notices on households are quite distressing.

Justice Minister Orsat Miljenic says that the bill would make it possible for people unable to service their debts to make a fresh start and for creditors to settle their claims evenly. It needs to be said that the idea of a personal bankruptcy i.e. insolvency over the property of a consumer is a completely new institute in Croatian legal system and a completely new and seemingly psychologically disturbing concept to the citizens of this former communist country. Croatia’s citizens had thus not had the benefit of “fear of personal bankruptcy” to guide them, or at least many of them, in curbing their personal spending/borrowing so that it doesn’t run beyond their means, leading them into personal bankruptcies about which possibilities they had known all along. Couple this with very high levels of unemployment and, therefore, no means for servicing personal loans it is more than certain that many, many thousand people will be forced into choosing with ill ease the option of personal bankruptcy.

What tricks will come out of Croatia’s government’s hat in trying to sort this mess out for even if it is private household debt, it is nevertheless a debt crisis for the country, for the government to implement and facilitate measures that would alleviate the crisis. Conventional ways governments deal with household debt crises include stimulus policies such as tax cuts and job creation programs, but also moves such as making the debts smaller by say forgiving some of the debt through mortgage principal reduction or eroding the value of the debt by increasing inflation etc., or a combination of all of these. But of course, there is always the risk of increasing public debt in the process of decreasing household debt crisis!

Bankruptcy is habitually perceived as a shocking and scandalous event, tarnishing the reputation, stigmatizing … and if job prospects are not there for one to pick-up life and start over again the future is indeed grim.

It now remains to be seen whether the Croatian Government will upon establishing the institution of personal bankruptcy also facilitate some kind of debt rescheduling and/or debt reduction for indebted citizens so that they might lead a dignified life as they pay off their debts. If any country owes this to its citizens it is Croatia particularly due to the fact that corrupt privatisation undertakings in the past two decades has seen a calamitous drop in jobs and public assets, while its Reconstruction and Development Bank (HBOR) wasted deep rivers of funds on “big business” that failed to create jobs that would replace a good number of those lost instead of stimulating small to medium business ventures spread locally to create local jobs.

Croatia’s Finance Minister Boris Lalovac said Monday 28 July that it was symptomatic that out of the 317,000 people with frozen accounts, 2,000 alone owed half the amount, namely 14 billion kuna. He said that among them were people accused of crime and should not be regarded in the same light as people who ended up with frozen accounts because of the recession. “Freezing of bank accounts and citizens’ debts did not occur accidentally,” he said. “All this happened because of the ‘credit Eldorado’ from 2006 to 2008. The amounts are so large because among debtors there are ‘wolves from Wall Street who gambled with real estate’. When we look into the debt structure we see that some 2,000 citizens owe 14 billion Kuna. We’re talking about the ‘golden boys’ who blew money into dust. There are some 150,000 citizens who cannot pay off debts up to 10,000 Kuna – and we will help these citizens – that is the duty of this Social Democrat government,” he concluded for Croatia TV news.

I truly doubt there are “golden boys” or “Eldorados” to speak of here in the significant way minister Lalovac describes. What is most worrying in this is that the public cannot ascertain from the Minister’s statement regarding “golden boys” – who owe 50% of the national household debt – whether in fact these “golden boys” are able to and have the capacity to manage their debt liabilities. It is to be expected that most people whose accounts have been frozen are ordinary people struggling to exist without employment, unable to service their loans/debts.

Justice Minister Orsat Miljanic has dubbed the new Consumer Bankruptcy bill “ a new life” while some citizens from the list of those threatened by personal bankruptcy call it “creating ghettos” – ghettos where one’s life will be controlled by others! Certainly, it seems that the citizens, as opposed to the government, are not wearing rosy glasses. They are well aware of the restrictive and significant impact upon their lives that personal bankruptcy brings and in no way see it as a welcome ‘new life’. Many have been forced into poverty through corruption and theft found in the privatisation of public companies and assets process and they are the ones to use this opportunity not only to seek alleviation of their crisis but also to seek more rigorous actions against the corrupt many and for payment of fines as well as for return to the state of all ill-gotten personal wealth amassed through corruption.

Having in mind that a significant slice of Croatia’s GDP is derived from consumer spending and the latter has significant effect on the health of the economy and that manufacturing or production is not likely to increase to an adequate job-creation level any time soon, the government has a task ahead of it that needs to ensure that the number of declared personal bankruptcies will not be so large that it significantly affects or decreases avenues of consumer spending purchase power accumulation. It would seem from Minister Lalovac’s statement that the Croatian government is looking at helping those with less than 10,000 kuna debts (which is equivalent to less than 2 months of average wage), and this suggests that there is a determination to avoid a large number of personal bankruptcies. How many though will end up personally bankrupt and how such personal bankruptcies may give rise to new citizens’ actions in fighting the corruption that has led to their personal financial demise through loss of job opportunities is a question that must await its answer for many months to come. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)