US embassy cable - 04ZAGREB1646

UNCLAS ZAGREB 001646 
 
SIPDIS 
 
 
SENSITIVE 
 
TREASURY FOR VIMAL ATUKORALA 
STATE FOR EB/IFD/OMA LIAN VON WANTOCH AND EUR/SCE CARI ENAV 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, HR, Trade 
SUBJECT: EMBASSY COMMENTS ON ICRAS RATING REVEIW FOR CROATIA 
 
Sensitive but Unclassified -- please protect accordingly. 
 
1.  (SBU) Embassy Zagreb supports proposal to maintain 
Croatia's ICRAS rating on sovereign debt at the current C 
minus, and to increase the non-sovereign risk rating to C 
minus. 
 
2.  (SBU) While the fiscal and current account deficits 
warrant close monitoring, and the failure of Croatia to 
complete its last Stand-by Arrangement must be recognized, we 
agree with the drafters of the Country Risk Assessment Report 
that Croatia is at a different place economically and 
politically than it was in 2001, when the ICRAS ratings were 
last determined. 
 
3.  (SBU) We would stress the following factors: 
 
-- The banking sector has been revamped since the beginning 
of the decade, and is one of the most open and sophisticated 
in the region.  Central Bank measures to slow the inflow of 
money to the banks -- flows that have fueled an import boom 
-- appear to be working. 
 
-- The worst of the fiscal deficits (2003) and current 
account deficits (2002) appear to be behind us, and should 
the government keep close to its announced targets, the twin 
deficits should be under control.  (The ability of the new 
government to keep to its ambitious budget targets remains 
untested.  Should Croatia be unable to keep the current SBA 
on-track, the ratings might need to be revisited.) 
 
-- The beginning of EU negotiations early next year and the 
desire of the government to close the gap between its 
accession track and those of Romania and Bulgaria will 
provide a powerful incentive for the GOC to ratchet down the 
deficits.  The EU has been a very effective proponent of 
Croatia keeping within an IMF program and the fiscal 
discipline that encourages -- it was key in causing the new 
government to pursue a new agreement. 
FRANK 
 
 
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