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Croatia Cancels Debts For Tens Of Thousands Of Its Poorest People

CREDIT: AP
CREDIT: AP

Croatia’s government is canceling hundreds of millions of dollars in debts for the lowest-income people in the country. The leaders hope to boost consumer spending and reverse various nasty economic trends — or at least keep their jobs when the next parliamentary elections roll around.

Only the poorest Croatians are eligible for the program, which is intended to reach about 60,000 people. Debt relief recipients must earn less than 1,250 kuna per month — about 15 percent of the average national wage — and have debts smaller than 35,000 kuna ($5,100). Forgiving such debts will cost between $31 million and $300 million. That total will fall on a mixture of government treasuries and private companies, including multiple banks, telephone companies, and utilities, who will hope to benefit in the long run from improved economic conditions that could follow the debt forgiveness.

Croatia’s poverty rate compared to the rest of Europe CREDIT: Dylan Petrohilos
Croatia’s poverty rate compared to the rest of Europe CREDIT: Dylan Petrohilos

When people have too much debt, those obligations loom over every consumption decision they make. When they spend less, the economy as a whole suffers for that lost consumer demand. In extreme cases such as those Croatia’s government is targeting here, people’s bank accounts get frozen or their paychecks get garnished, exacerbating the chilling macroeconomic effect of those private debts.

This same basic debt and consumer spending phenomenon is at play even in much larger and stronger economies like America’s, where the recent explosion of student debt is derailing young people’s ability to buy all the job-creating goods and services that a person needs when she starts a family and forms a household. The money Americans spend servicing student debt alone could be buying 155,000 brand new houses per year, or hundreds of millions of trips to Disney World. Groups springing out of the Occupy Wall Street movement in the U.S. have purchased and canceled tens of millions of dollars in medical and educational debt, but Croatia’s far more ambitious debt canceling effort is unprecedented.

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Croatia’s ambitions are grander because its problems are far more dire. The Croatian economy has shrunk by 13 percent since 2009 and the country’s recession has lasted six years, according to the Financial Times. With high overall unemployment and one in every two young people unable to find work, the country’s economic free-fall is reminiscent of higher-profile european catastrophes in Greece, Spain, and Italy. The debt-leavening effort should provide some measure of stimulus by restoring some ability to spend for the poorest Croatians, but the country likely still needs outside help from the International Monetary Fund and European Central Bank. Financial assistance from those sources generally comes with stringent conditions, such as the austerity requirements that even IMF economists acknowledge made Greece’s recession both deeper and longer than it might otherwise have been.

After years of dealing with the economic fallout from service cuts and aggressive budget balancing efforts, the political consequences of austerity are starting to become clear. The left-wing party Syriza just won national elections in Greece, and the new national leadership’s determination to restore living conditions at home is putting strain on financial relationships abroad. Spain’s own newfangled far-left populist party, Podemos, is looking to harness similar austerity-driven unrest into a controlling share of the spanish parliament and executive ministries in this year’s elections.

When the world’s developed governments resorted to austerity measures to cure the economic ailments brought on by the global financial crisis of 2008, they were relying on a set of economic theories that have since proven badly flawed. Basic spreadsheet errors undermined a key research paper purporting to show that countries essentially never recover economically if they allow their sovereign debt load to cross a tipping point in relation to their gross domestic product, but the errors were only found by a graduate student years after the tipping point idea had helped convince international elites that austerity was necessary. Other economists have likened using austerity to cure a recession to using leeches and blood-draining to treat illness in the middle ages, and one European Commission economist has said the elite consensus around austerity has made things worse across the Eurozone. But while the International Monetary Fund has acknowledged big errors in its predictions for Greece, the group has also maintained that austerity is the right approach for countries in Croatia’s situation.

Some left-wing forces argue that debts are worth far less than what creditors seek to recoup from borrowers. For evidence, they point to secondary markets where lenders resell defaulted loans for cents on the dollar, and argue that borrowers should get a chance to pay that market price to clear their credit.