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)

Croatian economy: Political blame game net – now cast wider

Finance Minister Slavko Linic - Photo: Boris Scitar/PIXSELL

Croatia’s finance minister Slavko Linic had spent a recent week in the USA in the successful bid to sell USD1.5 billion Croatian bonds to private investors. While increasing Croatia’s foreign debt, the government says this was essential in order to create the capability of repaying due foreign debt obligations and to create an atmosphere/conditions for foreign investments in Croatia.

In his interview by journalist Jadranka Jusresko-Kero, Vecernji List, 24 April, Linic stated how domestic analysts are ruining Croatia’s rating with the International Monetary Fund (IMF) and the World Bank (WB).

Linic stated that the result from his recent visit to Washington shows that the IMF and WB have faith in Croatia’s government’s plan to lift the economy and move it forward. “Imagine, Croatian analysts believe in us less than IMF and WB,” he said. The IMF and WB believe that our government has potential to bring on the needed reforms, he added, also stating that the negative attitude of domestic analysts is destructive as it discourages foreign investments.

Linic also said that eight years of HDZ (Croatian Democratic Union) government is to blame for the state of economy and that it is fortunate that Croatia is still able to secure foreign loans.

Reading other sources it would seem that the WB views about the potential of the Croatian government in which Linic is the finance minister have less to do with faith in the government and more with warnings.

On 24 April Croatian news agency HINA reported that in an interview for Al-Jazeera Balkans TV network World Bank Director for Croatia Hongjoo Hahm said “Croatia has had three years of negative growth, a very deep recession, the deepest since it became independent, and the World Bank’s outlook for 2012 is also negative. These are very difficult economic times for Croatia, but it is time for action for Croatia to weather this storm …

The World Bank has warned the countries of Eastern Europe and Central Asia about the negative effects of the spillover of the eurozone crisis, and Croatia, because of its close integration with Europe, can hardly avoid such a scenario. Croatia is very integrated with the rest of Europe, the integration of the Croatian financial market with Italy, Austria and Slovenia is high. The banks in Croatia are to a large extent foreign owned, and there is also great trade integration with Europe, especially with Italy. If the eurozone goes into a deeper and prolonged recession, the spillover of the crisis will have a negative impact on Croatia”.

Hongjoo Hahm has also stressed that the honeymoon period is over for the new government in Croatia and that now is the time for action.

The warnings that can be read between the lines in Hahm’s statements are stern.

Major overhaul and structural economic and fiscal reforms are essential. In particular, growth, genuine privatisation and increasing market competitiveness are faced with enormous challenges. Challenges are even greater in the reality of relatively high dependency on the government, which was deeply entrenched in the former communist Yugoslavia system and still fares strongly at the grassroots in Croatia.

As Hahm said: it is time for action and for Croatia to weather the storm.

A great storm will undoubtedly continue with processes needed to reform scandalously complex and slow bureaucratic red tape, corruption (in form of bribes) and sluggish work attitudes that seem to prevail in many key places processing licensing, approvals, registrations, etc. for any new business or investment.

Judging from what Hahm said there does not seem to be anything any domestic analysts can say that’s not already known to the world.

Linic’s criticism of domestic analysts is highly suspect. One can easily see that he may well be setting up a new culprit if his coalition government fails at needed economic and fiscal reforms. That is, time will come when he can no longer blame the old HDZ government, so he needs to find someone else, as time moves on.

In all honesty, Linic’a Social Democrats have spent many years in opposition since the beginning of Croatian independence shift (1990); between 1990 – 1999 they did nothing to influence economic reform and stamping out corruption, but rather concentrated on their own party’s political survival. When in government, 2000 – 2003, Linic was Deputy Prime Minister – again, not much done on reforms, and foreign debt increased. Again, in opposition from 2004 to 2011 – years wasted as Social Democrats failed miserably in their mandate to keep the HDZ government to serious account and push for changes.

In the interview with journalist Jadranka Juresko-Kero, Linic referred to Guste Santini, economist and analyst, when he expressed his objections to the negative views of analysts (private consultants) on problems facing the critically plunging Croatian economy. True analysts must tell the truth and work with the truth. As recent as 21 April Santini expressed his assessment of the situation as follows:

“… Local elections are before us and the Kukuriku (Cock-a-doodle-doo) coalition wants to win in local elections too.

Tax reform is not even in sight, yet. Changes in the tax system are only mild ironing out in relation to the changes that are needed and, therefore, appropriate to the Croatian economy…

What must concern us is the continued rise in unemployment. The investment cycle is just a mental construction. It is not certain that this year’s start of the investment cycle will have an effect on reducing the number of unemployed…

There’s nothing wrong with this “domestic analysis”, as far as I can see.

And, given the complex nature of the economic environment Croatia is in, it just may be that domestic analysts and economists, private operators, will be the ones (not the government rhetoric) who will, with their creativity, critique and knowhow, galvanise the nation into true economic and fiscal reform. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

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