Croatia’s Stock Market Index Plummets Amid Rising Debt Concerns

Ljubljana, Slovenia - The Croatian stock market index has seen a sharp decline in recent months, fueled by growing concerns over the country’s debt levels and macroeconomic stability.

Sharp Decline in Stock Market Index

According to data from Bloomberg and J.P. Morgan, the Croatia Stock Price Index (CRO Index) has fallen 20% since January 2007, with some of the largest declines occurring in March 2008. This decline is attributed to liquidity disturbances caused by renewed tensions in global financial markets.

Rising Debt Concerns

The country’s Emerging Market Bond Index (EMBI) has also seen a significant increase, rising from historical lows in mid-2007 and remaining high compared to other emerging European countries. The widening of Croatia’s credit default swap (CDS) spreads may suggest concerns over its external vulnerabilities.

Household Debt Reaches Alarming Levels

In addition, the ratio of Croatian household debt to GDP continues to grow, reaching 40% at the end of September 2007 - one of the highest levels among central and eastern European countries. This has raised macroeconomic concerns, as the share of bank lending to households has risen significantly since 1998, with around 40% of loans being used for housing.

Risks to Banks

The rising household debt ratio also increases the vulnerability of banks to a deterioration in debt servicing capacity. A significant portion of loans are denominated in foreign currencies, exposing banks to indirect FX risk. Furthermore, most loans are issued at floating rates linked to local or euro-area interbank market rates, subjecting banks to credit risk through customers’ interest rate exposure.

Non-Financial Corporate Debt

The debt burden of non-financial corporations is also growing rapidly, reaching 59% of GDP in end-2006. Debt owed to banks dominates the non-financial corporate debt structure, with around 54% of loans being FX-linked. While current corporate financial performance indicators are broadly satisfactory, there are concerns over the lack of diversification in bank loans to productive sectors.

Banking Sector Concerns

The country’s banking sector has also faced criticism for lowering its underwriting standards due to deregulation and strong competition. This has led to a rapid expansion of FX-linked loans to unhedged borrowers in 2005-06, further increasing the risk of debt servicing difficulties.

Conclusion

Overall, these developments have raised concerns over Croatia’s macroeconomic stability and the potential impact on its financial markets.