If Bankers were Dumping Money out of Helicopters, Croatia Couldn’t get a Cheap Loan

By 29 June 2016

Brexit - the referendum announcing the possible exit of UK from EU has rustled the world money channels. The value of the British Pound suddenly fell, global investors are rushing to buy Swiss Francs and Japanese Yen. To keep from larger disturbance, national banks around the world are promising to continue providing fresh cash at record low interest

Huge amounts of cheap money on the market usually mean cheaper loans. It is an opportunity for many states to refinance their debt and catch lower interest. What about Croatia with a technical government and no valid credit rating? Is Brexit an opportunity or threat to Croatian public finances - economists Zdeslav Šantić and Damir Novotny answer, Tportal writes on June 29, 2016.

“Brexit is an extraordinary event with a lot of uncertainty. As soon as the market is uncertain, it means more risk and more expensive credit. It remains to be seen how UK will separate from EU, there are many risks hard to quantify, while markets can react irrationally - interest rates could rise,” said Šantić, the chief economist of Societe Generale Splitska bank.

According to his words, the UK exit can slow the economy which is bad news for Croatia, especially if large trade partners fail, such as Germany, Italy and France.

As for future loans in the European market, Šantić feels they are more determined by the domestic political situation, which has already caused a fail of Euro bonds issue.

“We have to be aware that when there is political instability outside, we need stability inside which will propose plausible reforms, so investors will buy our bonds,” said Šantić with a warning: “If after Brexit there is a chain reaction and other countries demand EU exit, Croatia as a small country cannot exist on its own and might be under pressure from the market - loans will become tougher and more expensive.”

Economist Damir Novotny states it is questionable if UK will leave EU: “This remains to be seen, but this is a problem for the future UK government, some redefinition of UK and EU relations will occur.”

The pound has, he notes, fallen strongly after referendum results, but it will settle in the next weeks as it is the fourth world reserve currency. The English Central Bank has already announced large interventions, and access to cheap money means better loans.

“However, the future Croatian government must count on a stressful scenario in which interest rates will rise. Above all, we depend on the future government to solve internal problems and stabilise public finances. If this does not happen, there won’t be cheaper credit for Croatia,” he concluded with a reminder:

“Now everyone wants to buy German bonds with a negative interest of 0,95%. Investors want Germany to take care of their money and are ready to pay for it.”