Croatia hopes local banks will not start a confrontation over the planned conversion of Swiss franc-denominated loans because that would not help the lenders, Finance Minister Boris Lalovac told Reuters on Wednesday. Croatia adopted a law last week enforcing conversion of the Swiss franc loans, once popular during the credit boom of the 2000s, at the banks' expense. The banks have voiced discontent and readiness to seek legal remedy.
"I hope the banks will not open any confrontation with the government because thus they would jeopardise their own business as the state is the biggest and most reliable debtor," Lalovac told the Reuters Eastern Europe Investment Summit. "The fiscal risk (in case of a legal action by banks) hardly exists because the state always has instruments to compensate costs, like by introducing taxation on banks' assets which already exists in some European Union member states," Lalovac said.
He said the conversion would not jeopardise the stability of the banking system.. Croatia, which joined the European Union in 2013, has had six straight years of recession since 2008, with output shrinking about 13 percent, adding to strains on public finances. Zagreb is under scrutiny from Brussels for its high public debt of around 90 percent of gross domestic product and its budget gap.
However, Lalovac said he expected this year's general budget gap to fall below a targeted figure agreed with the European Commission of five percent of gross domestic product (GDP). "I think our gap will be lower by up to 4 billion kuna ($589 million) due to higher tax payments and consumer spending. We don't yet know exactly the gap generated by public companies, but the overall gap will certainly be below five percent," he said.
The centre-left government, which faces a parliamentary election this year, has raised its forecast for 2015 growth to 1.1 percent, from 0.5 percent, citing positive data from the first two quarters. Most analysts are still cautious and expect growth of up to one percent. Lalovac said his plan would be to further cut expenditures next year, most notably in the health sector and in public companies, like the indebted state highway company.
"Revenues can rise only through higher growth rates, there is no plan for new or higher taxes. We expect a primary budget surplus already next year, which should help stabilise our public debt," he said. He also said that the government had met this year's financing plans and no new borrowing was likely before next year, most likely in the second quarter.
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