Repairing balance sheets and other challenges - the case of Croatia and other CEE countries

Published: 26/9/2014

Repairing balance sheets and other challenges - the case of Croatia and other CEE
countries

Significant rise in private sector debt in the CEE countries in the pre-crisis period has generally not
been perceived as a potential danger and has been ascribed to the convergence process.  

Corporate and household sector indebtedness in the majority of the CEE countries is lower than the
EU average, but declining income and the worsening economic outlook in the period after the onset
of the financial crisis reduced sustainable debt levels.  

The CNB analysis shows there is a low need for Croatian households to additionally adjust their debt
to the disposable amount of income.   

The efforts to restructure the corporate sector and improve its profitability should be stepped up,
while debt reduction might not resolve the underlying issue of inefficient capital allocation and the
pre-bankruptcy settlement are the first step in that direction.   

The high level of NPLs in the CEE countries is usually seen as one of the main credit growth
constraints, which holds only if NPLs are not adequately provisioned.  

High NPL ratios motivated the CNB to tighten provisioning standards in order to deal with seizure of
collateral.

Another key issue for increasing the efficiency of NPL resolution is improving the legal environment
and strengthening creditor rights.  

There is no clear evidence that more credit is necessarily related to stronger economic growth. Focus
should be put on corporate sector balance sheets, rather than banks' balance sheets and credit.