ANALYSIS: Croatia cornered by a debt larger than its GDP

By Boris Raseta Apr 20, 2010, 6:07 GMT

Zagreb - Croatia has long been spending more than it has been making, covering the shortfall with loans and an apparently endless supply of cash from tourism ... all instead of embarking upon unpopular reforms to cut spending and face the crisis.

But with tourists cutting back and lenders wary, Croatia may be facing deep trouble. And, unlike some richer countries that have fallen into similar straits, Croatia doesn't have a lot of places to turn for help. Economists and politicians disagree on the severity of the problem and even whether the country needs to make a sharp turn from its present course. Some say it can afford to wait.

According to official data, Croatia's total foreign debt currently runs at 44 billion euros (60 billion dollars). That compares to a gross domestic product at 39 billion in 2008, a number which declined in 2009.

There is no way around it, Croatia owes more than it makes.

Part of this is due to the economic crisis, which struck Croatia hard, most significantly damaging its key industry, tourism. Proceeds in that field dropped by 1 billion euros in 2009, Tourism Minister Damir Bajs told the April 12 edition of Vecernji List.

The Austrian Raiffeisen Bank predicted in its country report that despite falling revenue, Croatia will stubbornly continue to spend excessively in 2010.

Opposition politician Radimir Cacic believes the country is economically safe, because he counts on the financial support of the European Union, which Croatia had hoped to join in 2012.

'There will be no disaster,' he told the weekly Globus. 'We will continue sweeping problems under the carpet until next spring and unemployment is going to grow, but by then we will be in the final dash to EU membership and will receive ample aid to make it.'

However, Croatia's pace toward the EU has slowed down to a crawl, with some of the toughest reforms - such as the privatization of its massive, subventions-dependent ship-building industry - still pending.

And the country's costs are unlikely to go down. Of 4.5 million people, 320,000 are jobless and another 1.15 million are pensioners, their weight adding to the economic strain.

Politicians may insist that the EU will help Croatia pull through as it has signaled it is willing to do with Greece. But worried voices point out that Athens had a hard time winning the bail-out promise. Furthermore, Croatia is only a membership candidate.

'Unlike Greece, we are still not a part of the EU - so may God help us,' political analyst Damir Grubisa told the German Press Agency dpa.

But Croatian proximity to the EU - combined with forecasts of 6 billion euros in tourism income this year - make it difficult to compare to other countries in financial straits.

The country is not like Greece, which nearly went bankrupt. Croatia's macroeconomic data are nowhere near as bad, economist Damir Jurcic told dpa, saying that the 'Hungarian scenario' is a more appropriate comparison.

'There, the government fell because of the crisis. Here, we de facto had the same situation, when prime minister Ivo Sanader resigned in July - only here there was no opposition willing to take the reins,' he said.

In his words, 'around a dozen other parameters' must be considered along with the debt data for a macroeconomic forecast. In the end, much, even the servicing of the foreign debt, will again depend on the summer tourist season, he said.

Most however predict that the country will tread some middle, if somewhat narrow path between the pits and business as usual.

'Croatia will not go bankrupt, but its maneuvering space is very limited,' the T-portal news site quoted economist Velimir Sonje as saying in a late March lecture.

Meanwhile, in case of urgent need, there is always the sale of the 'family silver' economist Ante Babic told dpa. 'The government still has chunks of the economy in its portfolio, so another privatization wave is ahead of us,' he said.