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Cablegate: Wide Divergence of Views On Prospect of Debt

VZCZCXRO0952
OO RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHVB #0872 3541522
ZNR UUUUU ZZH
O 191522Z DEC 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8870
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS ZAGREB 000872

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR/ERA, TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EFIN HR PGOV
SUBJECT: WIDE DIVERGENCE OF VIEWS ON PROSPECT OF DEBT
FINANCING CRISIS IN 2009

1. (SBU) SUMMARY: Since the government has failed in its
goal to balance the 2009 budget (septel), instead turning in
a plan for a 0.88 percent of GDP deficit, experts inside and
outside the government are discussing with renewed vigor
whether or not the economy can maintain the necessary
liquidity to avoid a major collapse next year. Individuals
in the financial services industry, as well as the head of
Croatia's largest tour operator, have told us it is just a
matter of time before the government is forced to turn to the
IMF for aid. Within the government, officials of the central
bank have not surprisingly been more optimistic, saying that
financing has already been lined up through at least the
first quarter of 2009. Nevertheless, the central bank today
downgraded yet again its GDP growth forecast to 1 percent for
2009, suggesting that pressure on the state budget could be
even higher. Croatia continues to have real advantages in
significant foreign reserves and a stable banking system, but
the mood in the private sector continues to darken, and the
government is finding it increasingly difficult to put a
positive spin on the situation. END SUMMARY.

2. (SBU) Conversations with private sector business leaders
reveal a generally sour mood. A prominent American
businessman in the financial services industry, who has long
experience in Croatia, told the Ambassador this week that a
Croatian government debt default was a real possibility and
that IMF aid was simply a matter of time. The chief
economist at the Croatian subsidiary of Raiffeisen Bank, as
well as the head of the Croatian Employers Association, have
recommended in the press that the government bring in the IMF
sooner rather than later. The CEO of Croatia's largest tour
operator, accounting for a third of bookings in Croatia's
most important foreign exchange earner, told us to expect a
serious economic slowdown next year as tourist numbers drop
and private sector companies struggle to find new lines of
credit. Indeed, according to Raiffeisen Bank, private
companies' foreign debt increased 40 percent last year,
accounting for by far the largest share of Croatia's overall
stock of foreign debt (an estimated 95 percent of GDP).

3. (U) Officials at the Croatian central bank (HNB)
understandably present a more optimistic face, and seem to
have the plans in place to back up their claims that the
crisis is manageable, for now. According to the HNB's
Director of Financial Stability, Croatia has already lined up
the funds necessary to finance government debt through the
first quarter of 2009. He also claimed that second quarter
debt financing should be manageable on the domestic market.
The plan for the second half of 2009 is, market permitting,
to issue a euro-bond in the neighborhood of 1 billion euro.
The HNB also points to its substantial foreign currency
reserves, an estimated 8 billion euro. The HNB governor
yesterday said he would be the first to recommend turning to
the IMF if he felt the situation were to become
unsustainable. He then announced that the HNB was
downgrading GDP growth forecasts for next year from 2 percent
to 1 percent.

4. (SBU) COMMENT: The government's inability to balance the
budget adds another degree of risk to an already fragile
outlook for 2009. And given the fact that government revenue
forecasts are based on a presumption of 2 percent GDP growth,
the deficit could easily spike even higher next year.
Croatia's high level of foreign reserves and reasonably
stable banking system continue to be bright spots for the
economy. There also continues to be a high level of suppport
for and confidence in the HNB. However, uncertainty in the
economy's fortunes has reached the point where there is
little room for error next year, or for any additional
unforeseen negative shocks. END COMMENT.
WALKER

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