On Tuesday, Crobex fell below the ‘’psychological barrier’’ of 1400 points, decreasing 4% and aggravating the depression existing on the stock market. The state of the stock market is not the only one problem causing headaches to the bankers, but it is surely adding fuel to the fire. The intense situation, caused by the lack of currency on the market, was culminated by another growth of interest rates to interbank short-term loans.

On the Zagreb currency market, the interest rates on short-term loans (overnight and one week loans) sky rocketed to over 35 % (annual), and the ZIBOR interest rate was somewhat lower, but still holding at a high 30 %. The reduced liquidity of the kuna on the market is a collateral victim, in circumstances in which even the Croatian National Banka (HNB) cannot aspire for the ideal or optimal, rather least bad solution. In an effort to maintain the stability of the currency that secures the stability of the country’s economy, the HNB would rather opt for the increased pressures on the interest rat, as the lesser of two evils, than allow for a drastic increase to the exchange rate. Because of the low availability of kunas on the market, it seems that certain banks have a problem maintaining the required amount of reserves and this week have received an official warning from the Central Bank. Although currently the daily reserves shortages on the banks’ accounts are not too dramatic, the fact is that on Monday the banks experienced a shortage of 133 million kn, while the cumulative shortage has risen to around 1.5 billion kn. Having in mind the money market interest rates, we must ask ourselves what about the HNB Lombard loans approved with collateral of treasury bills, and with a low interest rate of 9 %. As we heard, they are quite popular these days. In only one week, the amount of the Lombard loans have increased from 1,1 billion kn to 2,7 billion kn. Keeping in mind that the central bank recently reduced the ratio of the loan to the collateral (instead of 90 %, the loans are approved with a two times higher collateral, 50% ratio), it turns out that for these loans banks pledged double the amount of treasury bills. If we take the 5,4 billion kn they gave as a collateral and add an additional 4,25 billion kn they used to secure a weeks loan in last weeks repo auction, it is evident that banks are running out of treasury bill they can use deposit for currency (kuna) loans from the HNB.

These are all the reason why bankers are anxiously awaiting today’s repo auction. Therefore, along with last week’s announcement for 4,25 billion kunas, most of them are expecting the Central Bank to ensure further liquidity (taking into account the lowered levels of treasury bills due to the increase of Lombard loans), which would alleviate the situation and the pressures on the interest rates. Among banking circles, it can be heard that the HNB has recently achieved its goals through the combination of its recent moves – allowing access to1.25 billion Euros, increasing liquidity, by lowering the percentage levels required for hard currency deposits and also allowing for a larger hard currency exposure from 20% to 30%. In short, it is suspected that the HNB wanted to encourage the banks to “free” hard currency sales onto the market and it is known that one of the leading banks is planning to do just that. However, the sale of kunas to clients only reallocates kunas within the system and, therefore, towards certain financial circles, especially due to the lowered availability of treasury bills, which was the regular form of raising liquidity within the system. Also, the possibility should not be excluded that the HNB intervenes with hard currency moves in the opposite direction.