Silent debt monetization in Croatia

 

Every week, a new news headline comes out of the Croatian business press that our Finance Minister has successfully indebted the Croatian people by a smaller interest rate. Most of this funding is being done on a short term basis. The main problem however is that these treasury bill purchases are being financed in most part by the Croatian banking system.

The headline reads:

“Banking institutions and other investors have submitted offers worth HRK 2.583 billion and 57.4 million euros. Ultimately, the auction of treasury bills was entered in the value of 1.309 billion and 51 million euros.”

Since banks are battling with foreclosure issues and the inability of the masses to repay their loans tied to the Swiss Franc, it is somewhat surprising that they are flush with a surmountable amount of cash to absorb this kind of auction. Banks had an appetite for nearly double the amount they received signaling that a flight to safety is still intact. My question is: Where are the banks getting all these funds?

Maybe, its because that on April 4th 2012, the Croatian Central Bank lowered the reserve requirement from 15% to 13,5%.

The headline from two months ago goes as:

“Banks get a release of about 4.1 billion kuna, and more than 110 million in foreign exchange”.

Banks, flush with cash aren’t loaning to the business community; mostly to do with the fact that the private sector hasn’t yet deleveraged and the growing uncertainty of outstanding loans, unions contracts and a negative economic outlook.

So, the government is high fiving itself for managing its debt burden with printed money. We will just wait and see what happens when all this “shadow liquidity” hits a certain part of the economy and its perverse effects it will have on the capital structure of the economy.

It’s a shame that, unlike most Western European countries, we don’t have a yield curve that might show how the effects of expansionary monetary policy has on the economy.

A True “Austrian” Money Supply measure (TMS) would also help in seeking out where the next peak is going to be, and from historical data draw the time from peak to through to figure out when the cleansing of the system of malinvestments might occur.