As if growing uncertainty over Croatia’s EU entry date and the murder of a journalist investigating alleged government corruption were not bad enough, the credit crunch has begun to claim victims among eastern Europe’s overextended economies at an alarming rate. In a banking sector dominated by foreign-owned institutions, foreign currency lending had taken off in Croatia, potentially exposing borrowers and lenders alike in the event of a liquidity squeeze and exchange rate shock.
But unlike other eastern European countries, the financial authorities in Croatia had started sounding the alarm bell some years ago. In 2004, faced by Croatia’s strong credit growth which was fuelling the increase in foreign debt as Croatian banks took advantage of cheap funds from abroad, the Croatian National Bank (HNB) commenced a series of monetary measures designed to reduce these problems and also tackle the country’s high euroisation rate (measured by the share of foreign currency deposits, including kuna deposits indexed to the exchange rate, see chart overleaf).
