67 Chapter 3 BANKING AND FINANCIAL MATTERS ON CROATIA S ROAD TO THE EUROPEAN UNION Velimir onje Raiffeisenbank Austria Zagreb ABSTRACT The ability of a country to meet the criteria for financial convergence on the EU depends on four key factors the behaviour and structure of the banks and non banking financial service providers the degree of development of the money and capital markets the regulatory environment and the openness of the country to international financial currents In this work the factors that work in favour of a rapid accession by Croatia to the EU and those that are the key areas of vulnerability on the same road are identified The first group of factors includes the developmental level of the banking system whose structural characteristics competitiveness ownership structure and scope of financial mediation work in favour of rapid integration This group also includes the standardising regulatory framework the changes in which over the last few years have brought Croatia very close to the standards of the EU Non banking financial service providers are relatively undeveloped however where the investment and pensions funds are concerned their development and the regulatory environment rapidly converging on international standards guarantee imminent ability to be included in the integration processes The main areas of vulnerability are the undeveloped share capital market and a restrictive attitude with respect to international financial flows 68 Key words financial market capital market convergence on the EU international capital flows banking system INTRODUCTION The financial issues on some country s road towards the EU are usually brought down to those of whether the country is converging in terms of the quantitative criteria of Maastricht amount of inflation interest rates public debt fiscal deficit currency stability Sometimes the issue of the harmonisation of the standards with the legislation of the EU is highlighted However the most essential capacity of a certain country to meet the financial and associated standardising parameters of the EU depends primarily on the structure and behaviour of its institutions the behaviour and structure of banks and non banking financial services or institutions the degree to which the money and capital market is developed the regulatory environment and the openness of the country to international financial flows In this paper we shall show that Croatia has the characteristics of an advanced country in connection with most of these criteria A considerable lag can be noticed in the area of the development of the capital market and openness to international financial flows which might in the future turn out to be serious sources of vulnerability in the process of Croatia s accession to the EU BEHAVIOUR AND STRUCTURE OF FINANCIAL SERVICES The figures in Table 1 show a comparison of long term interest rates in Croatia and in other transitional countries Although the Maastricht criteria would tend to require a comparison of interest rates on long term government bonds the long term interest rates on commercial bank loans shown in the paper demonstrate the ability of the banking system to mediate between the demand for and supply of financial resources which belongs to the group of convergence criteria that are not measured by an unambiguously defined indicator In spite of this the competitiveness of the entire financial services sector is interpreted as an important structural precondition for EU membership Long term interest rates in Croatian banks were greater than those in the Czech banks among the transitional banks as recently as the end of 2000 As against the average in the EMU there was at that time a still 69 large 3 percentage points Then the reduction of interest rates occurred and they continued to converge on the European level In the middle of 2002 these rates were almost completely the same as the Czech rates They were larger than those in the EMU by only slightly more than one percentage point Table 1 Long term interest rates charged by commercial banks on loans Country 2000 June 2002 Czech R Hungary Polanda Slovakia Slovenia EU Croatia 8 1 13 4 21 4 9 6 18 4 6 2 9 3 6 6 10 5 13 8 9 8 15 5 5 9 7 1 Source HNB If one factors in the fact that inflation in Croatia is converging on EU criteria and that the trends in the exchange rate can already be interpreted as harmonisation with EU criteria see Mihaljek s paper in this collection fiscal issues remain the only really open financial questions on Croatia s road to the EU Table 2 We shall not offer any separate debate on fiscal indicators here since they are handled in detail in the chapter of Mihaljek Table 2 Summary view of the outlook for meeting the Maastricht criteria Criterion Inflation Interest rate Exchange rate Budgetary deficit Public debt Criterion met in 2001 Criterion expected to be met in 2002 or 2003 no no yes no yes yes yes yes no yes Long term trend good good good cannot be estimated cannot be estimated The methodological discrepancy of the fiscal accounts especially of the accounts of the quasi budgetary corporations such as HAC Croatian Motorways and the quasi budgetary funds after 2000 and the failure to be up to date in the publication of the fiscal statistics from August 2002 only the data from April were publicly available make every attempt to estimate a long term trend inadequately serious Since the long term trends in the public debt depend on the long term trends in the budgetary deficit the long term trend of the public debt cannot be estimated although its current level around 40 of GDP if government guarantees are not included and more than 50 if they are is still considerably below the level allowed according to the Maastricht criteria 60 of GDP 70 The measurable financial parameters should be looked at as the surface structure indicators of deep level power relations in society which are reflected in the relations in the financial system It is primarily the quality of institutions and the ability or inability of society to distinguish good and bad solutions in the creation of its economic and social policy that affect these relationships These lines of force can be read off in the manner of regulating and running central banking in the manner of regulating and running banking business operations For this reason in the sequel there will be a brief discussion of the standard parameters that have to be satisfied on the road to the EU As
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