LEADING BANKERS Bozo Prka, Franjo Lukovic, Petar Radakovic and Zeljko Rohatinski with former finance minister Borislav Skegro, who now backs one of the models of assistance for Croatian companiesCroatian National Bank Governor Zeljko Rohatinski might inject almost 16 billion kuna into the Croatian financial system. Nacional learned this exclusive news early this week, when a communication came from the Croatian National Bank in connection with the establishment of a fund for the bailout of faltering Croatian companies: besides the already announced reduction of the mandatory reserves of commercial banks from 14 to 12 percent, which would free up six billion kuna, if Government adopts his proposals for the bailout of these companies, the CNB could reduce the reserves by a further two percentage points, which would amount to a total of 12 billion kuna. Along with two billion kuna from foreign currency interventions and two billion kuna that banks keep in the CNB overnight, Governor Zeljko Rohatinski would thus free up as much as 16 billion kuna for Government and the economy.

This message was sent by Rohatinski to Government at a time when the state, i.e. Government is finally forced to adopt a decision on which of as many as three models for the salvage of the companies it will publicly endorse. The strong card played by Zeljko Rohatinski will have a strong effect on the other players who are trying, far from the public eye, to get Government to pick the models they have put forward. At the same time many Croatian business people have for days besieged politicians and Jadranka Kosor's advisors in an effort to have Government bailout their company.

The information of as many as three models and the dogged daily lobbying have over the past days been the cause of major squabbles between the interested parties, but at the explicit request of Croatian Prime Minister Jadranka Kosor none of the participants are permitted for a few more days to make any public commentary. Nevertheless, CNB Governor Zeljko Rohatinski is the only one to have last week ventured to publicly propose his own model, and then last weekend bolstered his idea with the announcement that, only if his model is adopted and strict rules, the Croatian economy would have as much as 16 billion kuna at its disposal. Well aware that there can be no further delay to the salvage of the companies and that every day means a great deal to the Croatian economy, Jadranka Kosor has decided to hold an emergency meeting between Christmas and New Year with all of the interested parties at which she will hear out all of the arguments and then opt for the model that Croatian Government will publicly endorse.

The first model that will be discussed is the establishment of a ten billion kuna "corporate bailout fund" being pushed by the Croatian Employers' Association. The second model involves providing state guarantees with the firm control, i.e. strengthening of the Croatian Bank for Reconstruction and Development (HBOR), which is what Croatian National Bank Governor Zeljko Rohatinski is advocating. The third model, which is based on the partnership of the private and state sector, is being pushed by some economic advisors to the Croatian Prime Minister. As Nacional's sources point out, Prime Minister Kosor has had her work cut out for her these past days in an attempt to reconcile the opposing factions, which are secretly lobbying by any way at their disposal in favour of their ideas, while it is her big hope that in the end all will accept a compromise solution. Judging by the differences in the proposed models, it is hard to expect that a final resolution will be accepted by the coming week. That is why it is much more likely that the fate of a possible fund will only be known after several rounds of talks, which could drag out through to mid-January. The first model, advocated by the Croatian Employers Association, is for now the best known to the Croatian public.

According to this plan, a crisis or intervention fund would be set up to save the economy. The fund would allegedly have some ten billion kuna at its disposal, of which the state would provide a billion, while the remaining nine billion would be secured by banks. The model was bombastically announced last week in some media and right away drew massive public attention, as it mentions a consortium of banks led by Zagrebacka Bank CEO Franjo Lukovic, whose bank would lead the consortium. The idea of this model is in fact the earliest one to emerge, as the leaders of the Croatian Employers' Association first advocated setting up such a crisis fund a year ago, but the idea was never seen through. According to some sources the idea of this fund was opposed by former Prime Minister Ivo Sanader, whose poor knowledge of economics and the economy did not allow him even then to grasp the scale of the recession and the effects of the financial crisis on the Croatian economy, and saw the founding of any kind of "crisis" fund as an indirect admission of the failure of his Government. Sources in the Croatian Employers' Association point out that another major opponent of this fund was former Deputy Prime Minister and Economy Minister Damir Polancec, and it was only after his departure from the cabinet that the idea of setting up this kind of fund was given more serious consideration.

Advocates of this fund would above all help out the Croatian manufacturing firms that have found themselves in distress as a result of the general financial crisis, while quite unclear to many is the announcement that it would also be used to buy up and nationalise some defunct firms. This is especially true of the Pevec retail chain, which is allegedly to be salvaged by precisely this model. The state, i.e. the Croatian Privatisation Fund, would buy it for one kuna, nationalise it and then, in a few years time, sell it as a healthy company. It is, in fact, the case of Pevec that is a good indicator of the lack of unity in the positions of Croatian economists and business people, of which there are three categories. The first advocate a Pevec bailout, citing as their chief arguments social sensitivity, i.e. saving three thousand jobs, and the hypothetical value a revived company would have in two, three years. The second group of economists is absolutely opposed to salvaging Pevec as they are of the opinion that only manufacturing companies that can export their products should be helped out, while Pevec is a retailer that bases its operations on imports and the country has, therefore, nothing to gain in salvaging it.

The third, pragmatic group of economists is opposed to saving Pevec, but allows for the possibility of helping out some of Pevec's suppliers, companies like Samoborka, which has a good manufacturing and export perspective, but has found itself in trouble because Pevec is not paying its suppliers. The disunity in the opinions concerning Pevec, which has for months now been the subject of newspaper articles and of which the public is already well informed, shows just how difficult it will be, which ever model is picked in the end, to set the criteria and decide which companies are to be bailed out and which are not. It is to be expected that the state could in a greater or lesser degree advocate saving jobs, i.e. opt for a social criteria, which in many cases can be quite contradictory to the criteria banks will have - the security of their investment, i.e. the repayment of loans issued. And the role that banks are to play in the first model is not entirely clear. Among business people it has been pointed out of late that the banks have money and want to invest it, and the only thing they want is for someone, such as the state, to assume a part of the risk.

THE NEW ECONOMY MINISTER Duro Popijac (left) will have a major say in implementing the plan to save the economySince domestic companies are finding it hard to get credit from banks over the past year, there is speculation that the state, besides the one billion kuna it would provide via various subsidies, could to a certain degree guarantee funds the banks would invest into the joint fund. Croatian National Bank Governor Zeljko Rohatinski is the chief proponent of the second model, based on which Government, the CNB and the commercial banks would join forces in assisting Croatian companies. The CNB could inject six billion kuna into the financial system by reducing the mandatory bank reserves from 14 to 12 percent, two billion through foreign currency interventions and two billion based on liquid funds the banks keep in the CNB overnight, which in total exceeds ten billion kuna. Early this week Rohatinski even upped the ante - a message came to Government from the CNB that the possibility that the CNB reduces the mandatory reserves to only 10 percent is not excluded, which would put over 12 billion kuna into the financial system for a start, and with the foreign currency intervention and overnight funds amount to as much as 16 billion kuna. To do so Rohatinski wants to direct all of this liquidity into healthy economic growth, and by no means into new spending and deficit growth. And since neither the banks nor the business sector wishes to cover the credit risk, the risk and control would be assumed by the state via the Croatian Bank for Reconstruction and Development.

This way the state would not have to waste time setting up a new fund, because the HBOR already has a routine way of doing business, and its long time head Antun Kovacev is considered a top-notch expert for whom praise is coming from all sectors. And so, with additional state support and empowerment, it could in fact be HBOR that takes the key role in the development of the Croatian economy, but that would mean that the emphasis would be on helping out almost only export-oriented companies. Besides CNB Governor Rohatinski, some banks are also pushing the second model. Late last week Splitska Bank chief economist Zdeslav Santic said that he does not support the Croatian Employers' Association's proposal as it "is unclear in many points," and added that the "plan proposed by the CNB has the greatest chance of succeeding." His statement was echoed by Erste Bank CEO Petar Radakovic, who said that, if the Government would, as per CNB Governor Rohatinski's proposal, guarantee these lines of credit, the banks could drop interest rates for businesses by a percentage point or two. In any event, while the first model leaves room for speculation as to whether failing companies could be in line for bailout money, that scenario is practically excluded from the second model.

Rohatinski has, namely, already announced that a release of funds would only come if the state established clear and safe mechanisms of control over the issue of credit, which would only be issued to companies with good projects, and not to questionable firms. Little is known for now of the third model, allegedly penned by Prime Minister Kosor's advisor Borislav Skegro. Since Skegro has spent the past decade in the private sector and knows much about private equity funds, he has been attributed with the idea of setting up a venture capital fund that would be a version of sorts of a public-private partnership model. According to some forecasts it would be possible to set up not just one, but rather several such funds. They would have to receive permits from HANFA (the Croatian Financial Services Supervisory Agency), pool some 100 to 200 million kuna of private capital, and then the state would back these funds with an equal stake. Candidates for the money in these funds would be selected on solely economic criteria, and the state would not manage the funds but would have, rather, only the power of veto. As a prerequisite of restructuring, companies seeking aid from these funds would have to, which is the key condition for investing venture capital, be prepared to open the door to stakes in ownership.
And just like with the model being pushed by Governor Rohatinski, only healthy companies would have an opportunity to get assistance from the fund, where there is a clear calculation of recouping the money. And while it is, in the opinion of many, high time that Government looked to resolving the problems of Croatian business people, the fact that there are several diverse models for the bailout program shows that there is no clear vision of the resolution among all the players involved - business people, banks, economists and politicians.

Likewise, although Prime Minister Jadranka Kosor has asked most of her associates and the players to refrain from giving public statements before a final decision, business circles have been abuzz these days with analysis of all of the existing models, and there has already been some insinuation at the level of speculation. There have been attempts to discredit the first model through allegations that the Croatian Employers' Association wants to help out only some of its own members, it has been mentioned that Borislav Skegro would certainly like to help out some of the companies he was connected to while in the private sector, and there are also frequent criticisms levelled at the banks, which have these past years protected themselves to the detriment of businesses, to which they have all but closed the doors to lines of credit - now that they have plenty of money in their coffers for investment, they continue to refuse to provide credit to businesses unless the state comes on board with its guarantees.