Hypo Bank case under investigation in Croatia

29/04/2008

The recent court case against Croatia for improprieties in the Hypo Bank acquisition of Slavonska Banka may dampen the enthusiasm of foreign investors.

By Kristina Cuk for Southeast European Times in Zagreb –29/04/08

Croatia must pay 40m euros to Austria's Hypo Bank for improprieties in the sale of part of Slavonska Banka. [EU]

The Croatian Agency for Bank Oversight has lost in the case of Hypo Bank AG International vs Croatia in the Arbitrage Court in London, in a verdict disclosed last month. Croatia owes 40m euros to Austria's Hypo Bank for improprieties in the sale of part of Slavonska Banka in 1998. Hypo Bank accused the Agency for Bank Oversight of misrepresenting Slavonska Banka's balance sheet and thereby violating conditions for the sale of bank shares.

Hypo Bank invested in Croatia's Slavonska Banka in 1998, as a strategic partner of the European Bank for Reconstruction and Development (EBRD), by buying stock from a state agency. During the acquisition, Slavonska Banka concealed significant losses it was carrying on its books, causing Hypo Bank to lose 35m euros after the share purchase.

After it could not reach agreement with Croatia on compensation, Hypo Bank sought redress in court. First, it filed suit in the Arbitrage Court in Zagreb. After it failed to find satisfaction there, it moved on to London's Arbitrage Court.

"Croatia will pay the 40m euros from its tax revenues," President Stipe Mesic said. He emphasised that someone has to be held responsible, blaming "typical 'maestros' of Croatian-style privatisation.

The case is under investigation by police and other governmental agencies. Slavonska Banka refused to comment. Prime Minister Ivo Sanader is demanding answers on two such suits that Croatia lost -- the one filed by Hypo Bank and another by Italy's Astaldi, to which Croatia also owes damages after losing a dispute over construction of the Zagreb-Goričan highway.

"We want everything to be investigated thoroughly: who is responsible and if this was a case of incompetence or something else," Sanader said on March 27th, confirming that the state prosecutor and the justice ministry were looking into the case.

The outcome of the Hypo Bank case has sparked criticism from Austria. The country claims Croatia is demonstrating bad governance, slow jurisprudence and corruption.

Croatian Foreign Minister Gordan Jandrokovic rejected the criticism as unjustified. Nevertheless, these cases could inhibit foreign investment, undermining the country's growth and stability. That was the consensus of economists discussing Croatia for the Economist Intelligence Unit. After interviewing 600 investors, they found investment risks -- as exemplified by Slavonska Banka -- wage increases and the end of privatisation are the main disincentives.