Cablegate: Croatia Announces Bailout Fund Plan for Struggling

VZCZCXRO1614
PP RUEHIK
DE RUEHVB #0066 0291449
ZNR UUUUU ZZH
P 291449Z JAN 10
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 9866
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY

UNCLAS ZAGREB 000066

SIPDIS
SENSITIVE

PASS TO EUR/SCE, TREASURY FOR INT'L AFFAIRS LARRY NORTON

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV HR
SUBJECT: CROATIA ANNOUNCES BAILOUT FUND PLAN FOR STRUGGLING
ENTERPRISES

1. (SBU) SUMMARY: Prime Minister Kosor announced a
much-anticipated crisis financing initiative for struggling
enterprises on January 28. This "bailout" plan is the first
major initiative of an economic strategy to fight the
recession, and has already received the support of the
opposition SDP. Executive Director of the Croatian Bank for
Reconstruction and Development (HBOR) Branimir Berkovic
outlined for us the GoC's plan for its $4.5 billion bailout
fund for companies impacted by the economic crisis in a
January 27 meeting. He explained that the fund will be
financed through a combination of $2 billion from the
Croatian National Bank (HNB) and either a GoC-backed bond or
capital fund. The bailout fund will be managed by private
commercial banks in Croatia. Berkovic believes the central
role of commercial banks in managing the funds will minimize
the risk that they could be allocated on political criteria,
or simply as additional subsidies to failing enterprises. END
SUMMARY

2. (SBU) On February 11 the GoC will publicly announce the
model and procedures for a $4.5 billion (22 billion Croatian
kuna, HNK) economic bailout fund for small-to-medium
enterprises (SMEs) weakened by the recent economic crisis,
according to Branimir Berkovic, Senior Executive Director of
the Croatian Bank for Reconstruction and Development (HBOR).
He explained that liquidity problems are becoming acute in
many sectors of the economy, and commercial banks have been
reluctant to issue new credit, especially to SMEs. He said
HBOR attempted to provide emergency short term loans to SMEs
last November, but these measures were not enough to have a
significant impact on the situation. (Note: Anecdotally, we
heard from commercial bank analysts that these loans were
underutilized because of slow bureaucracy in the application
process.)

3. (SBU) The current plan is for the Croatian National Bank
(HNB) to release 3% of banks' reserves for the bailout fund,
or roughly $400 million (2 billion HNK), according to HNB
Governor Zeljko Rohatinski. The rest of the remaining 2.5
billion kuna will be raised through either private investment
funds or a bond issue with GoC guarantee. The current plan
will be to issue a public tender for private banks to bid on
fund money to be used for commercial loans. Berkovic told us
that the HBOR is still working on the model for the loans,
but that he hopes the loans will be available for SMEs at a
tiered rate of 2-4-6% depending on a SMEs assets and
liabilities. (NOTE: He added that SMEs of 'special state
interest' or those involved with export businesses
responsible for bringing foreign currency into Croatia will
be eligible for the 2 percent rate.) The current commercial
loan rate is around 10 percent in Croatia, and Berkovic
mentioned that he was having some difficulty in persuading
the private banks to participate in an effort they see as
having little profit potential.

4. (SBU) Addressing SME eligibility, Berkovic told us that
SMEs will have to qualify with commercial banks for these
funds, which will maintain a higher standard for lending than
if the loan program was implemented through a state-owned
bank. He said foreign owned SMEs registered in Croatia will
likely be eligible for the funds as well as some state-owned
enterprises (SOEs). But Berkovic noted that the loans will
be targeted at production enterprises rather than retailers.
Berkovic predicted that the funds will be available in the
market for lending approximately three weeks after the GoC's
expected announcement on February 11. This delay will permit
the GoC to prepare required legislation needed for the fund,
to ensure EU compliance, and to draft an agreement between
HBOR and the commercial banks that will implement the loans.

5. (SBU) COMMENT: It appears that this fund is a sincere
attempt to help restart the economy and not merely a scheme
to continue channeling state funds to failing state
enterprises. It is also encouraging that the plan has
received the support, if lukewarm, from the opposition. The
next big economic test for the government comes in
mid-February, with the latest attempt to privatize Croatia's
shipyards. If that effort is successful, and if these
bailout funds work as planned to stimulate business activity,
then the government will have created some real economic
policy momentum and could even silence a few of the critics
who have accused the Kosor government of doing nothing
substantive to help bolster Croatia's faltering economy. END
COMMENT.
WALKER

© Scoop Media