Cablegate: Embassy Comments On Icras Rating Reveiw for Croatia

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS ZAGREB 001646

SIPDIS

SENSITIVE

TREASURY FOR VIMAL ATUKORALA
STATE FOR EB/IFD/OMA LIAN VON WANTOCH AND EUR/SCE CARI ENAV

E.O. 12958: N/A
TAGS: EFIN ECON HR
SUBJECT: EMBASSY COMMENTS ON ICRAS RATING REVEIW FOR CROATIA

Sensitive but Unclassified -- please protect accordingly.

1. (SBU) Embassy Zagreb supports proposal to maintain
Croatia's ICRAS rating on sovereign debt at the current C
minus, and to increase the non-sovereign risk rating to C
minus.

2. (SBU) While the fiscal and current account deficits
warrant close monitoring, and the failure of Croatia to
complete its last Stand-by Arrangement must be recognized, we
agree with the drafters of the Country Risk Assessment Report
that Croatia is at a different place economically and
politically than it was in 2001, when the ICRAS ratings were
last determined.

3. (SBU) We would stress the following factors:

-- The banking sector has been revamped since the beginning
of the decade, and is one of the most open and sophisticated
in the region. Central Bank measures to slow the inflow of
money to the banks -- flows that have fueled an import boom
-- appear to be working.

-- The worst of the fiscal deficits (2003) and current
account deficits (2002) appear to be behind us, and should
the government keep close to its announced targets, the twin
deficits should be under control. (The ability of the new
government to keep to its ambitious budget targets remains
untested. Should Croatia be unable to keep the current SBA
on-track, the ratings might need to be revisited.)

-- The beginning of EU negotiations early next year and the
desire of the government to close the gap between its
accession track and those of Romania and Bulgaria will
provide a powerful incentive for the GOC to ratchet down the
deficits. The EU has been a very effective proponent of
Croatia keeping within an IMF program and the fiscal
discipline that encourages -- it was key in causing the new
government to pursue a new agreement.
FRANK

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