Failure to borrow money on the international market means the money needs to be acquired at home, with the bigger question – can the state service its debt without a proper government?
After failing to issue Euro bonds in the beginning of June, Finance Minister Zdravko Marić will try his luck in the domestic market, where traditional lenders are pension funds and banks, Tportal.hr reported on June 23, 2016.
“We’ll see how to situation with Brexit will unfold and what the state of the markets will be. We’ll test investors after failing to issue Euro bonds,” Marić said. The exact amount will depend on the needs of the state budget, investors interest and issue conditions.
Part of the money the state hoped to gain through Euro bonds was to cover the debt of 466 million Euro in bonds from 2011, due in the first half of July. To finance the budget deficit and pay off debt in 2016, the state plans to borrow around 3.2 billion Euro. Regardless of the political crisis, experts feel Croatia can service debts, at least in 2016. But if the state enters 2017 with an unstable government, serious issues could arise. Next year a record 3.55 billion Euro is due, not counting deficit.
Although Marić is now part of a technical government, laws provide for borrowing money needed to service commitments. Zdeslav Šantić, chief economist of Societe Generale Splitska bank, believes there won’t be any issues with public finances this year. “The international bonds failed, but I feel the money can be found in the domestic market, as there is enough liquidity. Along with that, the tourism season is here to fill the budget. Considering the political circumstances, state spending on capital investments will decrease, which is good for the deficit,” Šantić said.
Before a new government is formed, Šantić does not expect a new attempt at issuing Euro bonds. “Investors want a confident package of reforms. The cost of lending is based on it and the technical government cannot offer this.”
However, borrowing in the domestic market cannot be a long term solution, as 2017 will be a demanding year. Question is how the Croatian political crisis will be viewed by S&P, Fitch and Moody’s, whose ratings are due in July. Further decline in credit ratings could deteriorate the credit conditions. Šantić believes the agencies will wait for the parliamentary election in September.
Former SDP Finance Minister Boris Lalovac also fears the reaction of credit agencies. “We will have large problems if the government isn’t formed by November or December. This would greatly endanger the credibility of public finances,” Lalovac said.
