Croatian National Bank: Global Crisis and Credit Euroisation in Croatia - Working Paper W-33 - Jan 2012

Macroeconomic policy makers in Croatia need to decide whether they want to continue to accept an extremely high level of credit euroisation in the country and limit the related currency-induced credit risk by nominal exchange rate stabilisation and additional capital buffers of banks or whether they want to take active measures to reduce credit euroisation in the country. An analysis of the causes of the high level of credit euroisation is the first step in selecting the potentially most effective measures for its reduction. This paper analyses the evolution of credit euroisation in Croatia from 1995 to early 2010 to identify its possible causes. Based on the analysis made and a review of the recent literature, also discussed are possible measures to encourage credit de-euroisation in the country. In contrast to the prevailing opinion, it is not concluded that the main cause of the high level of credit euroisation in the country is the firmly entrenched deposit euroisation in combination with the legal obligation of banks to limit their exposure to direct currency risk by continuously adjusting the currency structure of their assets and liabilities. Quite the opposite, the causes of the high level of credit euroisation, at least in the period after 2003, should be sought in the firm entrenchment of credit euroisation itself due to historical, political and economic factors, while the high level of deposit euroisation reflects the banks' need to meet the logical legal requirement to match the currency structure of their liabilities and assets.