Financial Stability No. 8, Zagreb, January 2012

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3 Finncil Stbility No. 8, Zgreb, Jnury 1

4 PUBLISHER Crotin Ntionl Bnk Publishing Deprtment Trg hrvtskih velikn 3, Zgreb Phone: Contct phone: Fx: Those using dt from this publiction re requested to cite the source. Any dditionl corrections tht might be required will be mde in the website version. Printed in copies ISSN (print) ISSN (online)

5 Contents Introductory remrks 5 Overll ssessment of the min risks nd chllenges to finncil stbility policy 7 Mcroeconomic environment Government sector Box 1 Finncil conditions nd rel economic ctivity Household sector 7 Rel estte sector Non-finncil corporte sector 3 Box Supply nd demnd in Croti s corporte credit mrket 36 Bnking sector 38 Box 3 The lon loss provisioning policy: potentil source of instbility? 5

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7 Introductory remrks Finnce plys key role in the lloction of resources, i.e. the process of trnsforming svings into investments, nd therefore into economic growth nd n increse in the overll level of socil welfre. At the sme time, becuse finncil stbility is bsed on the confidence of finncil mrket prticipnts, it lrgely depends in turn on their perceptions nd behviour, which re subject to cyclicl swings. As finncil crises crete considerble economic nd socil costs, the mintennce of finncil stbility hs the chrcter of public good nd is thus n importnt economic policy objective. Finncil stbility is chrcterised by the smooth functioning of ll finncil system segments (institutions, mrkets, nd infrstructure) in the resource lloction process, in risk ssessment nd mngement, pyments execution, s well s in the resilience of the system to sudden shocks. This is why the Act on the Crotin Ntionl Bnk, in ddition to the min objective of the centrl bnk mintennce of price stbility nd monetry nd foreign exchnge stbility lso lists mong the min centrl bnk tsks the regultion nd supervision of bnks with view to mintining the stbility of the bnking system, which domintes the finncil system, s well s ensuring the stble functioning of the pyment system. Monetry nd finncil stbility re closely relted, for monetry stbility, which the CNB ttins by the opertionl implementtion of monetry policy, performing the role of the bnk of ll bnks nd ensuring the smooth functioning of the pyment system, lowers risks to finncil stbility. At the sme time, finncil stbility contributes to the mintennce of monetry nd mcroeconomic stbility by fcilitting efficient monetry policy implementtion. The CNB shres the responsibility for overll finncil system stbility with the Ministry of Finnce nd the Crotin Finncil Serv ices Supervisory Agency (HANFA), which re responsible for the regultion nd supervision of non-bnking finncil institutions. Furthermore, owing to the high degree to which the bnking system is interntionlised, s reflected in the foreign ownership of the lrgest bnks, the CNB lso coopertes with the home regultory uthorities nd centrl bnks of prent finncil institutions. The publiction Finncil Stbility nlyses the min risks to bnking system stbility stemming from the mcroeconomic environment of credit institutions nd the sitution in the min borrowing sectors, s well s credit institutions bility to bsorb potentil losses should these risks mterilise. Also discussed re CNB mesures to preserve finncil system stbility. The nlysis focuses on the bnking sector, due to its predominnt role in finncing the economy. The purpose of this publiction is systemticlly to inform finncil mrket prticipnts, other institutions nd the generl public bout the vulnerbilities nd risks thretening finncil system stbility in order to fcilitte their identifiction nd understnding s well s to prompt ll prticipnts to tke dequte sfegurds should these risks ctully occur. It lso ims t enhncing the trnsprency of CNB ctions to ddress the min vulnerbilities nd risks nd strengthen finncil system resilience to potentil shocks tht could hve significnt negtive impcts on the economy. This publiction should encourge nd fcilitte broder professionl discussion on finncil stbility issues. All this together should help mintin confidence in the finncil system nd thus its stbility. Finncil Stbility 5

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9 Overll ssessment of the min risks nd chllenges to finncil stbility policy Figure 1 Finncil stbility mp Finncil system resilience Actul/optiml interntionl reserves Euroistion Stress test Growth dynmics of corporte nd household debt Z-score Corporte debt/gdp EU-7 economic growth Household debt/income Vulnerbility of the economy Economic growth in the RC Public debt EU interest rtes Net externl debt/gdp Mcroeconomic environment EMBI Croti Blnce of pyments current ccount 11 1 The excerbtion of the debt crisis nd the deteriortion of the economic outlook for the eurozone in interction with the wek fiscl position hve incresed cpitl costs nd my bring new wve of recession in the country, with dverse consequences for finncil stbility in 1. Resilience of the Crotin bnking sector to externl shocks hs improved to some extent, but the rel chllenges to the preservtion of finncil stbility re still the implementtion of credible fiscl djustment nd improvement of the mediumterm growth outlook by structurl reforms. The min finncil stbility indictors for Croti re summrised in Figure 1. The finncil stbility mp shows chnges in key indictors of the possibility of occurrence of risks relted to the domestic nd interntionl mcroeconomic environment nd vulnerbility of the domestic economy, s well s indictors of finncil system resilience tht cn eliminte or reduce the costs should such risks mterilise. The mp shows the most recent mrket developments or projections of selected indictors nd their vlues in the comprble period, i.e. the previous yer. For ech vrible, n increse in the distnce from the mp centre indictes greter risks or system vulnerbility nd lesser resilience, s well s greter thret to stbility. Hence, n increse in the mp re suggests n increse in risks to finncil stbility, while decrese in the re suggests their reduction. Finncil Stbility 7

10 Overll ssessment of the min risks nd chllenges to finncil stbility policy The intensifiction of the debt crisis nd the deteriortion of the economic outlook for the eurozone will dversely ffect finncil stbility in Croti in 1. The expected slowdown of the EU economy nd recession in some of the mjor Crotin trding prtners will dmpen foreign demnd. In ddition, the high degree of uncertinty nd the version of interntionl investors to ssuming dditionl risks will hmper new borrowing nd refinncing of the debt mturing in 1. Due to combintion of wek export demnd nd impeded ccess to foreign finncil mrkets, the Crotin economy could enter mild recession. All this together will dd to the uncertinties. Therefore, possible deteriortion of the eurozone crisis in interction with reltively wek domestic fundmentls (rpid growth in the public debt to GDP rtio) could bring bout much more dverse mcroeconomic scenrio nd increse the risks to finncil stbility. Aginst the bckground of the renewed recession, the poor government finnce sitution will be one of the mjor risks to finncil stbility in 1. The postponement of the fiscl djustment process put Croti mong the few countries whose budget blnce deteriorted in 11. Combined with higher risk premium, which ws pushed up by incresed risk version due to the crisis deepening in the eurozone, this hs become thret to the country s solvency. The expnsive fiscl policy hs thretened Croti s credit rting, mde debt refinncing more difficult nd more expensive for ll sectors, with negtive implictions for finncil stbility. All this hs reduced the room for fiscl policy s it will be forced into procyclicl restrictions in view of the renewed recessionry trends expected in 1. As wek economic performnce lso dversely ffects the public finnce sitution, it is importnt to revive economic growth in the medium term. A medium-term economic stgntion impirs the sustinbility of ll debts nd is nother possible chnnel tht could ctivte n unfvourble spirl of growing mrket scepticism, more expensive refinncing, nd upsurge in privte nd public sector debt. In such conditions, the risk of credit risk mterilistion fced by the bnking sector will be somewht stronger in 1 thn in 11. Should the crisis esclte, the refinncing risk ssocited with foreign libilities nd the risk of cpitl flight from Croti would intensify, generting downwrd pressures on the exchnge rte nd rising interest rtes. This would further increse credit risk reltive to the bseline scenrio, hmper finncing nd dd to the risk of contrction in bnk lons. Although the bnking sector s whole hs reltively lrge buffers to protect its solvency even in the cse of mjor shocks, differentition within the sector hs been incresing. A possible need to set side dditionl vlue djustments for existing nonperforming lons or incorrectly clssified lons my further weken the cpitl of some smll bnks tht re lredy less cpitlised. In erly 1, the Crotin economy nd finncil system re somewht better prepred for new onslught of the finncil crisis thn t the time the previous edition of this publiction ws prepred. The continution of privte sector djustment to poor economic prospects eliminted the current ccount deficit in 11, which stbilised net externl debt nd reduced foreign funding needs in 1. Interntionl reserves lso incresed slightly in 11, while mturing externl debt will be lower in 1 thn in 11. No significnt mount of externl government debt flls due in 1. The bnking sector mostly relies on domestic svings, while for foreign funding it primrily turns to owners, which hve proved to be stble source of finncing during the crisis. However, the risks prent bnks fce due to the turbulence in the eurozone could build up pressures on the finncil system s foreign currency liquidity. The bnking sector lso fces up to the risks emerging from the new recession more strongly. After incresed pyments in, bnks mostly retined their ernings in 11, nd their cpitl growth followed sset growth. Also, their business performnce improved slightly in 11, which further strengthened buffers ginst dverse shocks. Finlly, bnks used the slower growth in non-performing lons in 11 to increse the coverge of these lons by vlue djustments. This reduced potentil new costs for vlue djustments for existing nonperforming lons. Unfvourble mcroeconomic nd finncil developments nd the incresed risk of mterilistion of dverse scenrios impose difficult tsk upon ll gents importnt for the mintennce of finncil stbility. Closely following foreign bnks, domestic bnks strted to chnge the reltive credit supply by sector, reducing in their portfolios the shre of lons to corportes deling in construction nd rel estte mngement. These corportes hve been recording stedy fll in ctivity nd weker lon servicing cpcity. Such policy on the prt of the bnks mitigtes risks to finncil stbility in the medium run. However, the bnking sector should mintin the current level of cpitl dequcy, while some bnks should rise it even further to continue to chnnel finncil surpluses efficiently under the hrsh circumstnces expected in 1. In concert with cpitl injections to less-cpitlised bnks, the ongoing process of mergers nd consolidtion in the bnking sector is nother option to stbilise weker bnks. Aginst this bckground, the government needs to begin fiscl djustment processes nd structurl reforms so s to put public finnces on sustinble pth. Urgent implementtion of credible fiscl djustment pln should, in the short run, provide ccess to interntionl finncil mrkets for the government, domestic corportes nd bnks t cceptble finncil terms. However, without improvement in the medium-term growth outlook, fiscl djustment efforts will led to prolonged economic stgntion, which my lso worsen foreign funding conditions. The cumultive drop in Crotin GDP since the onset of the finncil crisis hs not deprted significntly from the verge for the countries in the region, though the decline lsted somewht longer. Chnges in the sectorl lloction of lons, which begn in nd continued in 11, hve somewht 8

11 improved the growth outlook. Still, the postponement or bsence of reforms to fcilitte relloction of cpitl to profitble sectors with better growth perspectives will mke Croti economiclly stunted in the medium run. A rdicl improvement of the business nd investment climte, prticulrly the stronger protection of ownership rights, coupled with reforms of the socil security systems, the lbour mrket nd public dministrtion should become economic policy priorities. As before, the centrl bnk will intervene should there be ny mjor disruptions in the domestic or foreign finncil mrkets, to llevite their impct on monetry nd credit developments nd exchnge rte stbility. However, no monetry or mcroprudentil policy mesure cn improve the medium-term growth outlook nd eliminte risks to finncil stbility emerging from prolonged economic stgntion, which cn be delt with only by structurl policies. Finncil Stbility 9

12 Mcroeconomic environment The growing risks of deteriortion in finncil stbility nd eurozone recession impose the need for sizble shift in domestic economic policy so s to improve the country s risk perception. The interntionl mcroeconomic environment is highly likely to deteriorte in 1. The crisis in the eurozone sovereign debt mrket is thret to bnking sector stbility nd dversely ffects consumer confidence nd business expecttions. Growth forecsts for the eurozone hve been slshed, nd even the possibility of nother economic slump is not excluded. This would ctully be new bottom of the recession tht begn with the globl finncil crisis of 8 (Tbles 1, nd 3). Multiple efforts of eurozone member sttes to stbilise the sovereign debt mrket hve not yielded ny significnt results (Tbles nd 3 nd Figure ). Although there is lrger funding from eurozone funds, the Greek debt solution dopted involves privte investors prticipting more in the costs of reducing the debt to sustinble level. However, efforts to increse the EFSF s funding cpcity nd thus prevent spillover of the crisis to other eurozone countries filed to restore investor confidence. In mid-11, the crisis spred to the Itlin nd Spnish sovereign debt mrkets, rising the yields on government bonds to levels unsustinble in the long run (Figure ). In the eurozone, there is no lender of lst resort for sovereign debt. The min problem in the short run is the mrket belief tht the EFSF hs insufficient funding cpcity to ssume the role of lender of lst resort, i.e. secure unlimited liquidity on the government bond mrket. However, there is lso the min structurl problem of the eurozone being monetry union without fiscl competences, i.e. without fiscl union elements cpble of gurnteeing the long-term public finnce sustinbility of ll eurozone members. As this solution would imply unlimited

13 Tble 1 Economic growth, exports nd industril production in selected developed nd emerging mrket countries Annul GDP growth rte Qurterly GDP growth rte, Q t /Q t-1 Annul rte of chnge in exports of goods Annul rte of chnge in industril production (sesonlly djusted) 11 1 b Q/11 Q3/11 Q/11 Q3/11 Q/11 Q3/11 USA EU Germny Itly Sloveni Slovk R Czech R Polnd Hungry Estoni Ltvi Lithuni Bulgri Romni Croti Estimte. b Forecst. Sources: Eurostt, CBS, Bloomberg, OECD nd CNB (for Croti). trnsfers mong eurozone members, it ctully points to the irreconcilbility of the principle of unlimited politicl sovereignty of the member sttes nd the efficient functioning of the monetry union in the globlised finncil mrket. In other words, there is no politicl support in eurozone countries with strong finnces for utomtic trnsfers to countries with fiscl deficits, nd there is no politicl support for nec- Figure Business nd consumer confidence indices index points Eurozone business confidence index US business confidence index Eurozone consumer confidence index Crotin consumer confidence index right 7 5 1/6 6/6 11/6 /7 Sources: Bloomberg nd CNB. 9/7 /8 7/8 1/8 5/9 /9 3/ 8/ 1/11 6/11 11/ index points essry djustments in the ltter countries. Under the current institutionl rrngements, there is no gurntee ginst sovereign defult risk. Hence, politicins re fcing the difficult tsk of finding solutions cpble of ensuring both voter nd finncil mrket confidence. Under the current rrngements, the ECB s role is limited to interventions in the secondry bond mrket to secure the smooth functioning of monetry policy trnsmission. Therefore, the mrket perception tht there is no effective lender of lst resort for member sttes wekens investor confidence nd strengthens pressures to sell bonds, thereby turning the liquidity crisis into solvency crisis of vulnerble countries. The negtive feedbck between the sovereign bond mrket nd eurozone bnks hs lso plyed n importnt role in the spred of the crisis (Figures nd 5). Lrge exposure of bnks to vulnerble eurozone countries genertes significnt losses in bnks blnce sheets. Together with perception of limited government cpcity to support under-cpitlised bnks, this hs led to crsh in the mrket for long-term bnk finncing nd shrp drop in interbnk mrket trnsctions. Combined with potentil deposit outflows, which hve lredy begun in most risky countries, this stifles the bility of bnks to finnce the economy nd my prompt resurgence of the finncil crisis. In view of the interconnectedness of the globl finncil system, the crisis could esily turn into new globl crisis. In such conditions, bnks reduced their exposure to peripherl eurozone sovereign debt in 11 nd compensted for the lck Finncil Stbility 11

14 Mcroeconomic environment Figure 3 Key interest rtes of the min centrl bnks nd leding mrket interest rtes Fed EONIA ON USLIBOR ECB 6M EULIBOR Fed benchmrk rte forecst ECB benchmrk rte forecst % Tble Fiscl blnce nd current ccount blnce in selected developed nd emerging mrket countries Fiscl blnce, s % of GDP (ESA 95) Current ccount blnce, s % of GDP 11 1 b 11 1 b USA EU Germny Itly Portugl Irelnd Greece /7 6/7 11/7 /8 9/8 /9 Sources: Fed, ECB nd Bloomberg. 7/9 1/9 5/ / 3/11 8/11 1/1 6/1 11/1 Spin Sloveni Slovk R Czech R Figure CDS spreds for 5-yer bonds of selected eurozone countries bsis points Portugl Greece right 1/9 3/9 5/9 Belgium Spin Irelnd Itly Credit defult swps (CDS) spred is n nnul premium tht CDS buyer pys for protection ginst credit risk ssocited with n issuer of n instrument. Source: Bloomberg. 7/9 9/9 11/9 1/ 3/ 5/ 7/ 9/ 11/ 1/11 3/11 5/11 7/11 9/11 11/11 5 bsis points Polnd Hungry Estoni Ltvi Lithuni Bulgri Romni Croti Estimte. b Forecst. Sources: Europen Commission, Europen Economic Forecst, utumn 11 nd CNB (for Croti). of funding in the mrket by incresingly relying on ECB liquidity fcilities. 1/ Figure 5 CDS spreds for 5-yer bonds of selected bnks / Unicredit S.p.A. Intes Snpolo S.p.A. Commerzbnk 3/ / 5/ Source: Bloomberg. 6/ 7/ 8/ 9/ / Deutsche Bnk Société Générle Bnco Sntnder 11/ 1/ 1/11 /11 3/11 /11 5/11 6/11 BNP Pribs Riffeisen Zentrlbnk 7/11 8/11 9/11 /11 11/11 1/ bsis points A fiscl greement is therefore step in the right direction on the long journey to permnent stbilistion. The EU summit in December 11 mpped some steps towrds solutions tht should clm the mrket for eurozone sovereign debt nd stbilise the finncil sector. The endevour to strengthen the institutionl frmework, ensuring long-term fiscl nd finncil stbility in the eurozone, includes decisions to strengthen fiscl discipline mong member countries through the fiscl compct, s it is clled, involving constitutionl cp on budget deficit nd public debt, with utomtic penlties, nd stronger supervision of fiscl nd economic policies in both eurozone member sttes nd other EU members willing to join the compct. At the sme time, efforts re mde to strengthen the liquidity support system for solvent countries. The expeditious relistion of the pln to increse the EFSF s funding cpcity nd ctivtion of the Europen Stbility Mechnism (ESM) should s erly s mid-1, combined with dditionl funding to the IMF, significntly enhnce the cpcity to provide support 1

15 Figure 6 CDS spreds for 5-yer bonds of selected emerging mrket countries Bulgri Czech R. Hungry Polnd Source: Bloomberg. Croti Romni 1/8 3/8 5/8 7/8 9/8 11/8 1/9 3/9 5/9 7/9 9/9 11/9 1/ 3/ 5/ 7/ 9/ 11/ 1/11 3/11 5/11 7/11 9/11 11/11 Figure 7 EMBI spreds bsis points Tble 3 Public nd externl debt in selected Europen emerging mrket countries s % of GDP Public debt Externl debt 11 1 b 6/ Sloveni Slovk R Portugl Itly Irelnd Greece Spin Czech R Polnd Hungry Estoni Ltvi EMBI Europe EMBI globl EMBI Croti 1/7 3/7 5/7 7/7 9/7 11/7 1/8 3/8 5/8 7/8 9/8 11/8 1/9 3/9 5/9 7/9 9/9 11/9 1/ 3/ 5/ 7/ 9/ 11/ 1/11 3/11 5/11 7/11 9/11 11/11 Source: J. P. Morgn bsis points Lithuni Bulgri Romni Croti Estimte. b Forecst. Sources: Eurostt, World Bnk, Qurterly Externl Debt Sttistics nd CNB (for Croti). to countries fcing liquidity problems nd under-cpitlised bnks. According to the most recent estimtes of the Europen Bnking Authority (EBA), the ltter hve cpitl shortge of round EUR 115bn. Figure 8 Yields on Crotin nd benchmrk Germn bonds mturing in 18 nd their spred /7/11 Yield on Crotin eurobonds Yield on Germn bonds Yield spred between Crotin eurobonds nd Germn bonds 1/7/11 /7/11 3/8/11 Source: Bloomberg. 13/8/11 3/8/11 /9/11 1/9/11 /9/11 //11 1//11 //11 1/11/11 11/11/11 1/11/11 1/1/11 11/1/11 1/1/11 31/1/11 /1/ bsis points In prllel to this, the ECB cut its interest rte twice in utumn 11 (Figure 3), nd decided to introduce three-yer liquidity lons nd expnd the list of eligible collterl. It thereby enbled strong improvement in bnk liquidity nd, indirectly, the liquidity in the sovereign debt mrket. Mrkets hve not yet become stble due to uncertinties surrounding the mesures dopted (Figures, 5, 6 nd 7). A further deteriortion in finncil mrket conditions should, t lest in the short run, be prevented by the implementtion of mesures to strengthen finncil support mechnisms for eurozone countries nd bnks, nd by relinquishment of demnds tht privte investors prticipte in the costs of sovereign defult. More permnent stbilistion of mrkets hinges on the implementtion of the fiscl compct, which should be finlised in Mrch 1. As this is relted to number of legl nd politicl issues, mrket uncertinties hve continued. A finl long-term solution in the form of fiscl union, which would involve the issue of eurobonds, the levying of txes t the EU level, nd suprntionl supervision of the finncil sector, Finncil Stbility 13

16 Mcroeconomic environment Figure 9 Cpitl inflows to Europen emerging mrket countries Investment of commercil bnks, net Direct equity investment, net Portfolio equity investment, net Investment of other privte creditors, net b Estimte. b Forecst. Source: Interntionl Institute of Finnce, Cpitl Flows to Emerging Mrket Economies, September 11. Figure Foreign cpitl inflows nd GDP growth in Croti % nd s % of GDP Current ccount blnce Rel GDP growth rte Annul growth of domestic bnk lons right Annul growth of totl lons right billion EUR s % of GDP hs not yet ppered on the horizon, though the fiscl compct is the first step in tht direction. To chieve long-term finncil sustinbility of the eurozone, it is crucil to secure the economic recovery of countries tht hve serious problems of low competitiveness (Tble 1). Combined with fiscl consolidtion nd the reduction of cpitl costs to n cceptble level for countries with fiscl deficits, this my be chieved only in the context of reblnced growth ptterns in the eurozone (Tbles nd 3). In ddition to structurl reforms, this implies stronger consumption s well s export demnd in countries with surpluses, which would enble the countries with deficits to recover thnks to export growth. No decisive steps in this direction hve been observed so fr. Bnks hve reduced their debts, which thretens credit growth nd economic recovery. The hrsher finncing terms in the mrket nd regultory pressures to rise the cpitl dequcy rtio to 9% of risk weighted ssets by mid-1, induced bnks to reduce their cpitl needs by selling ssets; the bnks re reluctnt to rise dditionl cpitl in the mrket in view of the low mrket vlue of their shres. Bnk efforts t divestment hve negtive impct on lons to the economy nd, in the negtive spirl, on fiscl performnces of the governments nd their bility to support bnks. In such conditions, lrge Europen bnks, which re importnt fund providers in interntionl mrkets, hve been reducing their exposures to ll min regions worldwide. This hs become significnt chnnel for the spred of finncil stress t globl level b Estimte. b Forecst. Sources: CNB nd CBS Plcements of bnks tht dominte in Southest Europen mrkets levelled off in the first hlf of 11. Prtly in response to the fll in demnd due to the sluggish economic ctivity in the utumn, these bnks reduced their plcements in the region nd nnounced further limittions of ctivities in 1 s well s tighter finncing terms. Figure 11 GDP growth pttern (contribution to growth) Net domestic demnd Exports GDP 6 % During the finncil mrket crisis, voltile prices of finncil ssets is ffecting countries economic fundmentls, which reverses the cuslity direction tht holds under norml circumstnces. Lower cpitl inflows crete pressures on foreign exchnge rtes, which reduces room for monetry stimulus to the economy. At the sme time, incresed risk version resulting from the eurozone crisis leds to n upsurge in risk premiums for countries in the region (Figures 6 nd 7). All this together is contribution to deteriortion in funding conditions for economic entities in the domestic nd foreign mrkets nd impeding economic recovery b Estimte. b Forecst. Sources: CNB nd CBS. 6 8 This is prticulrly true for the group of countries in the region, including Croti, which t the sme time hve to implement fiscl restrictions in view of reltively high debt levels (Tbles 1, nd 3). Croti s vulnerbility to externl finncil shocks will be somewht lower in 1 due to the smller mount of the externl debt flling due nd the solid level of foreign currency liquidity reserves of the monetry system (Figures 1, 15, 1

17 Figure 1 Svings nd investment totl nd by sector Figure 15 Short-term externl debt Privte sector svings Privte sector investment Svings-investment gp of consolidted generl government Svings-investment gp of privte sector Estimte. b Forecst. Sources: MoF nd CNB (estimte). Consolidted generl government svings Consolidted generl government investment Svings-investment gp in the country b s % of GDP Short-term externl debt by remining mturity Short-term externl debt by originl mturity b c 1 d Short-term externl debt by remining mturity is the mount of debt mturing in the reference yer, representing the sum of the blnce of short-term debt t the end of the previous yer nd long-term debt mturing in the reference yer. b Since end-7, externl debt hs been clculted ccording to the new methodology. c Estimte. d Forecst. Note: From 8 on, short-term debt by remining mturity includes round-tripping trnsctions, which represent n ccounting item tht hs neutrl effect. This item excluded, the debt mturing in 11 would decrese by bout percentge points of GDP. For more detils on round tripping, see CNB Bulletin, No. 15, Box Round tripping nd its impct on Crotin sttisticl dt s % of GDP Figure 13 Externl debt by domestic institutionl sector Figure 16 Selected indictors of externl vulnerbility 1/7 Government Bnks Other domestic sectors + direct investment Totl 3/8 6/8 9/8 1/8 3/9 6/9 9/9 1/9 3/ 6/ 9/ 1/ 3/11 6/11 9/ index, December 7 = Net externl debt/exports of goods nd services (t+1) Short-term externl debt by remining mturity (t+1) /(Gross interntionl reserves of the CNB + Liquid f/c reserves of bnks t ) (Short-term externl debt by remining mturity t+1 + Current ccount deficit t+1 )/(Gross interntionl reserves of the CNB t + Liquid f/c reserves of bnks t ) Note: Net externl debt is clculted s difference between gross externl debt nd gross interntionl reserves nd bnk foreign ssets. Since end-7, externl debt hs been clculted ccording to the new methodology % Figure 1 Totl externl debt by creditor Externl debt to other creditors Corporte externl debt to ssocited compnies Deposits nd lons received from prent bnks Figure 17 Projection of externl debt principl pyments in 1 by sectors Government Public nd mixed enterprises Privte enterprises domestic ownership Privte enterprises foreign ownership Bnks b s % of GDP 33% 3% 13% 1% % Since end-7, externl debt hs been clculted ccording to the new methodology. b Estimte. Finncil Stbility 15

18 Mcroeconomic environment Figure 18 Optiml interntionl reserves contribution of individul components Deposit outflow Foreign ssets growth Output loss CNB reserves Prent bnk deposits nd lons Externl debt growth less prent bnk deposits nd lons Optiml reserves if prent bnks re not lenders of lst resort Optiml reserves if prent bnks re lenders of lst resort billion EUR Figure 1 Totl debt by sector Corportes Government Households /11 Source: CNB finncil ccounts. s % of GDP Figure 19 Rel kun/euro exchnge rte Index of the rel HRK/EUR exchnge rte deflted by unit lbour cost in industry 1 Q1/ Q3/ Q1/1 Q3/1 Q1/ Q3/ Q1/3 Q3/3 Q1/ Q3/ Q1/5 Q3/5 Q1/6 Q3/6 Q1/7 Q3/7 Q1/8 Q3/8 Q1/9 Q3/9 Q1/ Q3/ Q1/11 Q3/11 Note: A fll in the index indictes rel pprecition of the kun ginst the euro. Sources: CBS, CNB nd CNB clcultions indices, 5 = Figure Net position of domestic sectors with respect to the rest of the world by instrument Currency nd deposits Lons Other Source: CNB finncil ccounts. Securities other thn shres Equities Totl / s % of GDP Figure Unit lbour cost Industry Construction Trde Q1/ Q3/ Q1/1 Q3/1 Q1/ Q3/ Q1/3 Q3/3 Q1/ Q3/ Q1/5 Q3/5 Q1/6 Q3/6 Q1/7 Q3/7 Q1/8 Q3/8 Q1/9 Q3/9 Q1/ Q3/ Q1/11 Q3/11 Sources: CBS, CNB nd CNB clcultions. indices, 5 = Figure 3 Net finncil position of selected domestic sectors with respect to the rest of the world by equity nd debt instrument Government (centrl, locl nd centrl government funds) equity libilities Bnks nd other finncil institutions equity libilities Corportes equity libilities Government (centrl, locl nd centrl government funds) debt libilities Bnks nd other finncil institutions debt libilities Corportes debt libilities /11 Source: CNB finncil ccounts s % of GDP 16

19 Figure Estimted credit demnd nd supply in the domestic mrket Figure 7 Gross domestic product, sesonlly djusted dt in constnt prices billion HRK Excess supply/supply shortge right Household nd corporte lons Estimted demnd for domestic lons Estimted supply of domestic lons billion HRK Itly Bulgri Croti Germny Hungry Sloveni Romni index, = Q1/3 Q3/3 Q1/ Q3/ Q1/5 Q3/5 Q1/6 Q3/6 Q1/7 Q3/7 Q1/8 Q3/8 Q1/9 Q3/9 Q1/ Q3/ Q1/11 Q3/11 9 Bsed on the results of the model used to estimte the impct of demnd nd supply on the Crotin credit mrket from Box Credit mrket disequilibrium, Finncil Stbility, No. 5, July. Source: CNB clcultions. Q1/ Q3/ Q1/3 Q3/3 Q1/ Q3/ Q1/5 Sources: Eurostt, CBS nd CNB. Q3/5 Q1/6 Q3/6 Q1/7 Q3/7 Q1/8 Q3/8 Q1/9 Q3/9 Q1/ Q3/ Q1/11 Q3/11 Figure 5 Estimted demnd for nd supply of foreign lons billion HRK Excess supply/supply shortge right Estimted demnd for foreign lons Estimted supply of foreign lons Q1/3 Q3/3 Q1/ See note under Figure. Source: CNB clcultions. Q3/ Q1/5 Q3/5 Q1/6 Q3/6 Q1/7 Q3/7 Q1/8 Q3/8 Q1/9 Q3/9 Q1/ Q3/ Q1/11 Q3/ billion HRK Figure 8 Chnges in employment registered with the Crotin Employment Service (CES) 1/ Newly employed persons from the register Newly registered unemployed persons directly from employment Net chnge, sesonlly djusted 6/ 11/ /5 9/5 /6 7/6 Sources: CES nd CNB clcultions. 1/6 5/7 /7 3/8 8/8 1/9 6/9 11/9 / 9/ /11 7/11 1/ number of persons, in thousnd Figure 6 Kun/euro exchnge rte nd overnight interest rtes % Overnight interbnk interest rte Averge monthly kun/euro exchnge rte right / 6/ 11/ /5 9/5 /6 7/6 1/6 5/7 /7 3/8 8/8 1/9 6/9 11/9 / 9/ /11 7/11 1/ HRK/EUR Figure 9 Chnges in GDP nd current ccount blnces from end-8 to end-11 (nnul dt) Itly Germny Polnd Portugl Czech R. Slovk R. Spin Hungry Irelnd Croti Sloveni Greece 5 5 chnge in current ccount blnce, s % of GDP Sources: Eurostt, CNB nd CNB clcultions. Romni Lithuni Estoni Ltvi Bulgri difference between ctul GDP nd potentil GDP, in percentge points Finncil Stbility 17

20 Mcroeconomic environment Tble Finncil ccounts for Croti Clims Libilities Corportes Finncil sector Domestic sectors Generl government Households Totl Rest of the world Totl libilities 6/11 6/11 6/11 6/11 6/11 6/11 6/11 Totl Rest of the world Households Generl government Finncil sector Corportes Monetry gold nd SDRs Currency nd deposits Securities other thn shres Lons Shres nd equity Insurnce technicl provisions Other clims nd libilities Totl Monetry gold nd SDRs Currency nd deposits Securities other thn shres 3 3 Lons Shres nd equity Insurnce technicl provisions Other clims nd libilities Totl Monetry gold nd SDRs Currency nd deposits Securities other thn shres 11 Lons Shres nd equity Insurnce technicl provisions Other clims nd libilities Totl Monetry gold nd SDRs Currency nd deposits Securities other thn shres Lons 1 1 Shres nd equity Insurnce technicl provisions Other clims nd libilities Totl Monetry gold nd SDRs Currency nd deposits Securities other thn shres Lons Shres nd equity Insurnce technicl provisions Other clims nd libilities Totl Monetry gold nd SDRs Currency nd deposits Securities other thn shres Lons Shres nd equity Insurnce technicl provisions Other clims nd libilities Totl

21 1/5 Figure Chnges in long-term sovereign credit rtings Croti Czech R. Bulgri Sloveni Hungry Romni 5/5 8/5 Source: Fitch. 1/5 /6 8/6 1/6 /7 8/7 1/7 /8 8/8 1/8 /9 8/9 1/9 Slovk R. Polnd / 8/ 1/ 3/11 7/11 11/11 AA+ AA AA A+ A A BBB+ 17 nd 18). Neither should the bnking sector hve significnt problems in meeting reltively wek credit demnd s it mostly relies on domestic deposits nd s prent bnks, which re the predominnt foreign funding source, hve reltively longterm horizon (Figures nd 1). In conditions of tight funding terms tht limit domestic demnd growth, the expected slowdown in eurozone economic growth nd export demnd presents lrge obstcle to Croti s economic recovery (Figures nd 11). Stgntion nd the drop in employment nd household disposble income re expected to continue throughout 1, while grdul economic recovery is postponed to 13, prllel to finncil mrket stbilistion nd EU nd regionl economic recovery. Although the risk of loss in the bnking sector is expected to grow in such conditions, its stbility should not be thretened thnks to the high cpitl dequcy rtio (estimted t round %). BBB BBB BB+ BB rting The strong externl djustment of the Crotin economy, which ws triggered by the fll in foreign cpitl inflows in the period fter the outbrek of the globl finncil crisis, reversed the upwrd trend in externl debt in 11 (Figures, 13 nd 1). Most of the djustment ws chieved through shrp decline in domestic consumption nd investment, which strongly reduced imports, while exports recovered grdully (Figure 11). With significnt growth in net svings of the privte sector, the increse in the generl government deficit, mostly due to the fll in tx revenues, hd counter-cyclicl effect nd mitigted the fll in ggregte economic ctivity (Figure 1). However, this lso generted very shrp increse in public debt, which exceeded 5% of GDP in 11 (Tble 3). Economic policy must improve the risk perception of the country by credible reforms. With the rise in risk version triggered by the escltion of the eurozone crisis, borrowing costs in the interntionl cpitl mrket hve reched levels unsustinble in the long run. This poses chllenge for economic policy mkers to improve the country s risk perception by decisive mesures nd secure ccess to foreign cpitl t price tht could stimulte economic recovery (Figures 6, 7 nd 8). In the medium run, it is necessry to implement credible fiscl djustment tht ensures public finnce sustinbility. This requires dditionl strengthening of the institutionl frmework to implement fiscl rules under the Fiscl Responsibility Act, primrily through stronger role of n independent fiscl bord. The intensity nd timetble of the djustment should be brought in line with finncil mrket developments, while tking ccount of the stge of the economic cycle so s to void excessive pro-cyclicl effects nd mintin socil nd politicl stbility. Credible structurl reforms re urgently needed to spur growth bsed on more dynmic exports nd investments (prticulrly those oriented towrds exports). For tht purpose, it is necessry to support the continued strengthening of competitiveness in trdble sectors, which hs been evident in the lst few yers, prticulrly by incresing productivity nd reducing unit lbour costs (Figure ), nd considerbly improve the business climte so s to improve business expecttions nd stimulte investment. In this context, mjor steps should be mde to strengthen the legl protection of ownership nd security of clim collection, reduce dministrtive brriers to businesses nd investors, step up further privtistion of stte ssets nd lbour mrket liberlistion, nd provide strong incentives to corporte reserch nd development ctivities. Finncil Stbility 19

22 Government sector Figure 31 Generl government debt billion HRK Rest of the world Other domestic sectors Bnks Shre in GDP right CNB projections. Sources: MoF nd CNB Figure 3 Generl government deficit Deficit verge (8 1) s % of GDP s % of GDP The trend for fiscl indictors to deteriorte, which is lrgely due to the globl finncil crisis, clls for the implementtion of credible fiscl consolidtion progrmme to secure public debt sustinbility nd void cut in the credit rting. Over the lst three yers public debt hs grown by 56%, burdening the government budget with 7% higher interest pyments. The pce of public debt growth ws in line with expecttions in 11. The exception ws the debt rising from shipyrd gurntees included in public debt nd mounting to round HRK 11bn or 3% of GDP, which ws trnsferred to 1. With the generl government deficit of round 5.% of GDP, public debt (excluding Crotin Motorwys, CM) will be round 5% of GDP in lte 11 (Figure 31), up 1% on the end of nd 56% more thn in the pre-crisis 8. The steep price of the crisis tht is being pid from the budget is lso reflected in interest expenses; they re currently 7% higher thn in 8 nd re still trending up. Croti hs reltively high budget deficit nd public debt levels. In the group of Europen emerging mrket countries, Croti ws mong those with the lrgest deficits in 11 (Figure 3). Exposure of the finncil sector (bnks) to the generl government sector went up % in 11. In comprison with the sme group of countries, Croti hs nerly the highest public debt (Figure 33), which further confirms the need for creful plnning of the 1 budget, prticulrly since economic stgntion in Croti will most likely continue. Ukrine Bulgri Ltvi Romni Hungry Source: IMF, Regionl Economic Outlook 11. Czech R. Sloveni Slovk R. Polnd Croti Lithuni Rpid growth in public debt is the min source of risks. Putting n end to the strong public debt growth, which chrcterised the recessionry period tht begn in 9, is the key fiscl policy chllenge for 1. Crotin public debt is still below % of GDP, but its fst increse needs to be stopped nd re-

23 Figure 33 Public debt Averge public debt level, 8 1 Bulgri Romni Ukrine Ltvi Czech R. Source: IMF, Regionl Economic Outlook 11. Lithuni Figure 3 Brekdown of public debt by remining mturity Short-term debt Long-term debt Threshold for EMs b CNB projections. b One of the indictors used for estimting the fiscl sustinbility risk in emerging mrket countries (EMs). Sources: MoF nd CNB. Figure 35 Currency brekdown of public debt In kun Threshold for EMs b Slovk R. Sloveni Croti Polnd Denominted in foreign currencies nd indexed to euro CNB projections. b One of the indictors used for estimting the fiscl sustinbility risk in emerging mrket countries (EMs). Sources: MoF nd CNB. Hungry s % of GDP % % 8 Tble 5 Thresholds of the fiscl sustinbility risk indictor in 11 Indictor Direction to be sfe Threshold Observtion for Croti r g b < 1.1% 1.6% Generl government public debt (s % of GDP) <.8% 5.7% Cycliclly djusted primry blnce (s % of potentil >.5%.9% GDP) Gross finncing needs (s % of GDP) <.6%.5% Shre of short-term debt s rtio of totl debt <.% 17.8% Debt denominted in foreign currencies <.3% 75.3% Weighted verge mturity of public debt (yers) > Short-term externl public debt (s % of interntionl reserves) < 61.8% 9.6% Bldcci, E., I. Petrov, N. Belhocine, G. Dobrescu, nd S. Mzrni: Assessing Fiscl Stress, IMF Working Pper, WP/11/. b Imputed interest rte on generl government debt, deflted by the GDP defltor (5-yer verge), minus rel GDP growth rte (5-yer verge). Sources: IMF WP/11/ nd CNB. duced to one-digit nnul growth rtes. The best indictors of the high risk of public debt re the growing spred nd yields on Crotin bonds; they incresed substntilly fter problems mounted in lrge eurozone countries (primrily Itly). The yield spred between Crotin bonds nd benchmrk Germn bonds mturing in 15 ws 3bp in erly April 11, rising to 69bp in erly December 11. The borrowing price for Croti in lte 11 ws much higher thn the price chieved t the most recent bond issue in July 11. In lte 11, yields on bonds mturing in 18 were 7.8%, which implies tht the yield on ten-yer bond would exceed 8%. The yield on oneyer T-bills in the primry mrket went up from.68% in lte My to.98% in lte December. Incresed sovereign risk hs spilled over to the bnking nd corporte sectors so tht the yield on the only Crotin corporte eurobond mturing in less thn five yers reched 11.9%. The implementtion of credible fiscl djustment is thus crucil both for the reduction of funding costs nd for finncil stbility. In ddition to necessry structurl reforms to chieve fster economic growth, this is key prerequisite for the mintennce of the current credit rting. It remins to be seen which fiscl consolidtion scenrio for 1 would be sufficient to preserve the credit rting. A cut in expenditures by 1% of GDP is minimum under the provisions of the Fiscl Responsibility Act. However, under the lterntive scenrio, generl government expenditures should be cut by 1.5% of GDP reltive to those in 11 to increse the probbility of preserving the current credit rting. This would eliminte the primry deficit s soon s 13, while the consolidted generl government deficit, including Crotin Mo- Finncil Stbility 1

24 Government sector Figure 36 Yield on primry issue of euro securities Figure 39 Gross finncing needs 9 11 Percent of GDP Threshold in percent for EMs Percent of tx revenues yield on primry issue, in % % yer yers CNB projections. 5 b One of the indictors used for estimting the fiscl sustinbility risk in emerging mrket countries (EMs). Source: MoF. Sources: MoF nd CNB. Figure 37 Projection of generl government deficit Figure Projection of public debt under vrious scenrios Deficit (ESA 95) Primry blnce Primry blnce for EMs b CNB projections. b One of the indictors used for estimting the fiscl sustinbility risk in emerging mrket countries (EMs). Sources: MoF nd CNB s % of GDP Bseline scenrio One-time deprecition in 1 Shock scenrio Mstricht criterion Public debt sustinbility threshold for EMs b CNB projections. b One of the indictors used for estimting the fiscl sustinbility risk in emerging mrket countries (EMs) s % of GDP Figure 38 Projection of generl government debt billion HRK Domestic public debt Externl public debt Public debt, s % of GDP right Public debt threshold for EMs Mstricht criterion right CNB projections. b One of the indictors used for estimting the fiscl sustinbility risk in emerging mrket countries (EMs). Sources: MoF nd CNB. 5 s % of GDP torwys, would fll to below 3% of GDP in 1. To tht end, it is most importnt tht the new government should offer credible medium-term fiscl djustment strtegy to chnge the expenditure side by reducing the deficit nd stbilise public debt t sustinble levels. Refinncing needs re lower in 1 thn in the previous yers, but there is still the risk on the side of foreign borrowing. In 1, externl nd domestic pyments stnd t HRK.bn nd HRK 1.6bn respectively, % less thn the totl of HRK bn pid in 11 (Figure 39). Foreign nd long-term borrowings hve become key risks in 1. The move towrds shorter mturity is lredy evident in the T-bill mrket, where bnks hve begun to subscribe currency-indexed T-bills mturing in three months insted of those mturing in yer. In the lst qurter of 11, over 5% of newly-subscribed currency-indexed T- bills were those mturing in three months. To mintin significnt shre of foreign finncing in 1, it is importnt to give

25 cler signl to foreign mrkets tht credible fiscl policy will be implemented. Crotin public debt hs fvourble mturity structure, but its verge remining mturity hs been shortened. The verge mturity of Crotin public debt is 5.7 yers (Tble 5), so high interest rtes on public debt could be endured in the short run. The new debt, which is used to repy mturing debt, will certinly not substntilly increse interest expenses on public debt in the short run. However, without mesures to contin the increse in public debt, i.e. the bsis on which interest is ccrued, nd without fll in interest rtes, interest expenses could gin grow strongly. In comprison with the previous edition of Finncil Stbility, the overll verge remining mturity of public debt ws shortened from 5.9 yers to 5.7 yers. The threshold for the shre of short-term debt in totl public debt is round % for emerging mrket economies. With its 16% shre, Croti is still fr below tht level (Figure 3). However, to mintin fvourble mturity structure strong fiscl consolidtion hs to begin in 1. Although stress tests show tht public debt remins below % of GDP, this level would soon be breched without fiscl consolidtion. The bseline scenrio ssumes stronger fiscl djustment thn tht envisged under the Fiscl Responsibility Act, grdul economic recovery nd stble exchnge rte. By contrst, the shock scenrio, which could be mterilised should the eurozone crisis become deeper, ssumes combined impct of % GDP fll nd one-off % deprecition. Under the ltter scenrio, public debt would come close to the Mstricht criterion of % in 1 nd to 66.% of GDP if Crotin Motorwys debt is included. Crotin Motorwys currently meet criteri for not being included in public debt. However, s Eurostt hs been imposing more stringent criteri in recent yers, CM could gin be included in public debt. Finncil Stbility 3

26 Box 1 Finncil conditions nd rel economic ctivity The tightening of finncing conditions nd n economic slowdown in most eurozone countries due to the esclting debt crisis on re certin to hve negtive effect on the Crotin economy. Numerous reserch ppers hve suggested tht there is strong interdependence between finncing conditions nd rel economic ctivity, which in smll nd open economy such s Croti hevily depend on globl economic nd finncil conditions. 1 These reserch ppers hve minly focused on the connection between these movements in norml circumstnces. This reserch, however, ims to exmine in more detil the interreltion between domestic nd externl finncil conditions nd economic ctivity ginst bckground of n imminent severe tightening of finncil conditions, nd use the quntifictions obtined for systemic risk projections. The Finncil Conditions Index (FCI), designed for this purpose, ws used to estimte stndrd VAR model, which is usully employed to quntify the interreltion between finncing conditions nd economic ctivity. As the projections bsed on this VAR model show the trjectory of the economy under the most likely scenrio, quntile regressions were used in the second step to mke projections tht would be vlid in the event of highly unlikely outcomes (the t-risk model), in order to estblish nd project systemic risk trends. Finncil conditions re determined by the interction of vrious economic nd finncil vribles tht re often summrized by the Finncil Conditions Index (FCI). The FCI is usully clculted using the best indictors for finncing vilbility, such s finncil mrket conditions, the price of cpitl, collterl requirements nd other lending conditions, depending on country-specific fctors nd dt vilbility. The principl component nlysis method, stndrdly used in the literture to obtin single indictor of generl finncing conditions from lrge number of vribles, trnsforms dt by sving s much informtion s possible from the initil vrible set in smll number of constructed series. This pproch ssumes the existence of stndrdised indictor of finncil conditions, tht is, of common component defined by the covrince between ech indictor nd other dt. The vribles for the construction of the FCI for Croti were selected tking into ccount the specific domestic monetry policy trnsmission mechnism, which is dominted by the exchnge rte chnnel. In ddition, due to the shllowness nd reltively low level of development of domestic finncil mrkets, some indictors tht re commonly used to clculte the FCI for developed countries were unvilble. They were replced by other vribles tht re especilly relevnt for smll nd open economies, such s cpitl inflows, globl interest rte trends or risk premiums on government eurobonds. The FCI for Croti ws clculted by the described method using the qurterly dt for the period from the beginning of to the end of the third qurter of 11 (Tble 1). The lrgest weight in the FCI for Croti is ssigned to domestic vribles whose growth hs negtive impct on finncing conditions, such s interest rtes on vrious ctegories of lons nd the rtio of non-performing plcements to totl plcements. Finncil conditions lso deteriorte becuse of the wekening of the kun exchnge rte ginst the euro nd currency bsket bsed on the shres of individul currencies in bnk ssets nd due to interest rte increses on government foreign nd short-term kun borrowing, while they improve with n increse in foreign direct investments. The dynmics of FCI in Croti nd in the eurozone were reltively well hrmonised during the period of bundnt globl liquidity nd low interest rtes preceding the globl finncil crisis, lthough the bsolute levels of the indices cnnot be compred due to differences in the clcultion methods. After the onset of the crisis, finncil conditions in the eurozone deteriorted significntly, were t their worst in erly 9 nd then begn to ese grdully. They continued to ese until the end of, tightening gin in mid-11. Finncil conditions in Croti strted to deteriorte in the sme period s those in the eurozone, but Q1/ Figure 1 FCI for Croti nd the eurozone Q3/ Eurozone FCI Q1/3 Q3/3 Q1/ Q3/ Q1/5 Croti FCI Q3/5 Q1/6 Q3/6 Q1/7 Note: Due to the difference in periods nd vribles included in the clcultion of the FCI for Croti nd the eurozone, the bsolute vlues for these two indices re not comprble. Sources: IMF, World Economic Outlook, October 11 nd CNB. filed to ese significntly in the lst two nd hlf yers, nd the index remined t n elevted level (Figure 1). The VAR model, used to estblish the interconnection between finncil conditions nd rel ctivity in Croti nd in the eurozone, contins four vribles: the qurterly growth rtes of rel GDP in Croti nd in the eurozone, nd the FCI for Croti nd the eurozone. These vribles were divided into two blocks: domestic nd foreign. This division tkes into ccount the fct tht Croti is smll nd open economy in which domestic vribles do not influence foreign vribles, but foreign do influence domestic vribles. Structurl shocks in the five-lg model were identified using the Cholesky decomposition under the ssumption tht the FCI hs n instnt effect on GDP growth rtes. The obtined results point to Q3/7 Q1/8 Q3/8 Q1/9 Q3/9 Q1/ Q3/ Q1/11 Q3/ stndrd devitions 1 See for exmple Krznr, I., nd Kunovc, D.: Impct of Externl Shocks on Domestic Infltion nd GDP, CNB Working Ppers, W-6, December. The eurozone FCI ws obtined from the IMF s World Economic Outlook for October 11.