IDEAS home Printed from
   My bibliography  Save this paper

Corporate Debt Overhang in Croatia: Micro Assessment and Macro Implications


  • Ana Martinis

    (The Croatian National Bank, Croatia)

  • Igor Ljubaj

    (The Croatian National Bank, Croatia)


High corporate sector leverage has often been highlighted as one of the major impediments to economic recovery. We conduct a debt sustainability analysis for Croatian corporates based on firm-level data. The analysis shows that around one third of the corporate debt in Croatia is unsustainable, thus pointing to sizeable deleveraging needs. By relating the estimated firm-level debt overhang indicator with investment activity, we find that over-indebted firms have reduced their investment to a greater extent than those without debt overhang. This especially holds among exporters and domestically owned private companies, whose higher sensitivity to unsustainable debt probably explains why they are less debt burdened. Our paper contributes to the existing literature by showing that, in the case of Croatia, the estimated firm-level debt sustainability thresholds, unlike the aggregate thresholds, capture the asymmetrically negative effect of debt overhang on investment. The estimated size and impact of the debt overhang in Croatia warrant policy engagement that would include more efficient bankruptcy procedures, swifter balance sheet clean-up supported by specific tax treatments, enhanced restructuring of unsustainably indebted state-owned companies as well as a comprehensive policy strategy for improving business climate and competitiveness.

Suggested Citation

  • Ana Martinis & Igor Ljubaj, 2017. "Corporate Debt Overhang in Croatia: Micro Assessment and Macro Implications," Working Papers 51, The Croatian National Bank, Croatia.
  • Handle: RePEc:hnb:wpaper:51

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Stephanie Lo & Kenneth Rogoff, 2015. "Secular stagnation, debt overhang and other rationales for sluggish growth, six years on," BIS Working Papers 482, Bank for International Settlements.
    2. International Monetary Fund, 2015. "Republic of Croatia: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/163, International Monetary Fund.
    3. International Monetary Fund, 2015. "Ireland: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/077, International Monetary Fund.
    4. International Monetary Fund, 2015. "Republic of Poland: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/182, International Monetary Fund.
    5. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. International Monetary Fund, 2015. "Singapore: Staff Report for 2015 Article IV Consultation," IMF Staff Country Reports 2015/199, International Monetary Fund.
    7. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    8. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    9. Mr. Albert Jaeger, 2003. "Corporate Balance Sheet Restructuring and Investment in the Euro Area," IMF Working Papers 2003/117, International Monetary Fund.
    10. Mr. Jongsoon Shin, 2017. "Corporate Restructuring and Its Macro Effects," IMF Working Papers 2017/017, International Monetary Fund.
    11. Ms. Manuela Goretti & Mr. Marcos R Souto, 2013. "Macro-Financial Implications of Corporate (De)Leveraging in the Euro Area Periphery," IMF Working Papers 2013/154, International Monetary Fund.
    12. International Monetary Fund, 2015. "Hungary: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/092, International Monetary Fund.
    13. International Monetary Fund, 2015. "Republic of Korea: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/130, International Monetary Fund.
    14. Michael T. Gapen & Ms. Yingbin Xiao & Cheng Hoon Lim & Mr. Dale F Gray, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-Wide Risk Transfer," IMF Working Papers 2004/121, International Monetary Fund.
    15. International Monetary Fund, 2015. "Panama: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/237, International Monetary Fund.
    16. Rodriguez-Palenzuela, Diego & Dées, Stéphane & Andersson, Malin & Bijsterbosch, Martin & Forster, Katrin & Zorell, Nico & Audoly, Richard & Buelens, Christian & Compeyron, Guillaume & Ferrando, Annali, 2016. "Savings and investment behaviour in the euro area," Occasional Paper Series 167, European Central Bank.
    17. International Monetary Fund, 2015. "Chile: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/227, International Monetary Fund.
    18. International Monetary Fund, 2015. "Czech Republic: Staff Report for the 2015 Article IV Consultation," IMF Staff Country Reports 2015/198, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Matej Bule & Andrijana Cudina, 2020. "Foreign Direct Equity Investments and Foreign Ownership Premium: the Case of Croatia," Working Papers 58, The Croatian National Bank, Croatia.
    2. Francisco Augusto & Márcio Mateus, 2021. "Portuguese firms’ financial vulnerability and excess debt in the context of the COVID-19 shock," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mislav Brkic, 2016. "Greek Sovereign Debt Crisis: Causes, Fiscal Adjustment Programs and Lessons for Croatia," Croatian Economic Survey, The Institute of Economics, Zagreb, vol. 18(1), pages 71-99, June.
    2. Wagner, Prof. Dr. Helmut, 2016. "The Building Up of New Imbalances in China: The Dilemma with ‘Rebalancing’," MPRA Paper 71494, University Library of Munich, Germany.
    3. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    4. Jeffrey A. Frankel, 2016. "International Coordination," NBER Working Papers 21878, National Bureau of Economic Research, Inc.
    5. Zharku Lutfi, 2018. "Irregular Receipts Leading to Budget Deficits in Kosovo," Baltic Journal of Real Estate Economics and Construction Management, Sciendo, vol. 6(1), pages 100-115, August.
    6. Wagner, Helmut, 2016. "The building up of new imbalances in China: The dilemma with 'rebalancing'," CEAMeS Discussion Paper Series 3/2016, University of Hagen, Center for East Asia Macro-economic Studies (CEAMeS).
    7. Zharku Lutfi, 2018. "(Un)Productive Use of Public Debt in Kosovo," Ekonomika (Economics), Sciendo, vol. 97(2), pages 18-37, December.
    8. Hyun-Hoon Lee & Donghyun Park & Kwanho Shin, 2017. "Effects of China's Structural Change on the Exports of East Asian Economies," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 25(3), pages 1-30, May.
    9. Andrei Leonidov & Mr. Alexei P Kireyev, 2016. "China’s Imports Slowdown: Spillovers, Spillins, and Spillbacks," IMF Working Papers 2016/051, International Monetary Fund.
    10. Zaman, Gheorghe & Georgescu, George, 2016. "Provocări în perioada tranziției la economia de piață în România. Creșterea gradului de îndatorare externă și internă [Challenges facing Romania during the period of transition to a market-based ec," MPRA Paper 70740, University Library of Munich, Germany.
    11. Barseghyan, Gayane, 2019. "Sanctions and counter-sanctions : What did they do?," BOFIT Discussion Papers 24/2019, Bank of Finland, Institute for Economies in Transition.
    12. Petia Topalova & Mr. Sergi Lanau, 2016. "The Impact of Product Market Reforms on Firm Productivity in Italy," IMF Working Papers 2016/119, International Monetary Fund.
    13. Kudrna, George & Tran, Chung, 2018. "Comparing budget repair measures for a small open economy with growing debt," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 162-183.
    14. Miroslav Nedelchev, 2018. "Reforms Of Banking Supervision In Bulgaria," Economics and Management, Faculty of Economics, SOUTH-WEST UNIVERSITY "NEOFIT RILSKI", BLAGOEVGRAD, vol. 14(1), pages 125-134.
    15. International Monetary Fund, 2015. "The Gambia: 2015 Article IV Consultation-Press release; Staff Report; and Statement by the Executive Director for the Gambia," IMF Staff Country Reports 2015/272, International Monetary Fund.
    16. Ahn, Daniel P. & Ludema, Rodney D., 2020. "The sword and the shield: The economics of targeted sanctions," European Economic Review, Elsevier, vol. 130(C).
    17. Emilio Fernández Corugedo & Mariana Colacelli, 2018. "Macroeconomic Effects of Japan’s Demographics: Can Structural Reforms Reverse Them?," IMF Working Papers 2018/248, International Monetary Fund.
    18. Andreea-Emanuela Drăgoi & Dorina Clichici, 2017. "The USA and the Russian Federation: What’s next in the post-sanctions era," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences;Institute for World Economy of the Romanian Academy, vol. 5(1), pages 54-65, June.
    19. Charles Abuka & Ronnie K. Alinda & Camelia Minoiu & Jose-Luis Peydro & Andrea Filippo Presbitero, 2015. "Monetary Policy in a Developing Country: Loan Applications and Real Effects," Mo.Fi.R. Working Papers 114, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    20. Iikka Korhonen & Heli Simola & Laura Solanko, 2018. "Sanctions and countersanctions − effects on economy, trade and finance," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q3-18, pages 68-76.

    More about this item


    corporate debt; investment; debt overhang; deleveraging; crisis; Croatia;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hnb:wpaper:51. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Romana Sinković (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.