Obligation Croatica 5.875% ( XS0645940288 ) en EUR

Croatica

100 % ▼

Croatie

XS0645940288 ( en EUR )

5.875% par an ( paiement annuel )

09/07/2018 - Obligation échue

Prospectus brochure de l'obligation Croatia XS0645940288 en EUR 5.875%, échue

100 000 EUR

750 000 000 EUR

La Croatie est un pays d'Europe du Sud-Est, membre de l'Union européenne, bordé par la mer Adriatique, connu pour ses paysages côtiers pittoresques, ses îles, son riche patrimoine historique et culturel, et sa gastronomie méditerranéenne.

L'obligation croate XS0645940288, émise par la République de Croatie pour un montant total de 750 000 000 EUR, avec un coupon de 5,875%, une taille minimale d'achat de 100 000 EUR et une échéance le 09/07/2018, a été intégralement remboursée à son prix nominal de 100%.

PROSPECTUS
REPUBLIC OF CROATIA
750,000,000
5.875 per cent. Notes due 2018
Issue price: 98.60 per cent.
The issue price of the 750,000,000 5.875 per cent. Fixed Rate Notes due 2018 (the "Notes") issued by the
Republic of Croatia (the "Issuer", the "Republic" or "Croatia"), will be 98.60 per cent. of their principal
amount. The Notes will mature on 9 July 2018 at their principal amount.
The Notes will be in bearer form in denominations of 100,000 and integral multiples of 1,000 in excess thereof
up to and including 199,000. No Notes in definitive form will be issued with a denomination above 199,000.
Interest on the Notes will accrue at the rate of 5.875 per cent. per annum from and including 8 July 2011 and will
be payable in Euro annually in arrear on 9 July in each year, commencing 9 July 2012. Payments on the Notes
will be made without withholding or deduction for or on account of taxes imposed by the Issuer except to the
extent described under "Terms and Conditions of the Notes -- Taxation".
Application has been made to the Commission de Surveillance du Secteur Financier (the "CSSF") in its capacity
as competent authority under the Luxembourg Act dated 10 July 2005 (the "Luxembourg Act") on prospectuses
for securities to approve this document as a prospectus and to the Luxembourg Stock Exchange for the listing of
the Notes on the Official List of the Luxembourg Stock Exchange and admission to trading on the Luxembourg
Stock Exchange's regulated market.
The Notes will be rated Baa3 (stable) by Moody's Investors Service Limited ("Moody's"), BBB- (negative) by
Standard & Poor's Ratings Services ("S&P"), a division of The McGraw-Hill Companies Inc., and
BBB- (negative) by Fitch Ratings Ltd. ("Fitch"). A rating is not a recommendation to buy, sell or hold securities
and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. As at
the date of this Prospectus, each of the rating agencies is established in the European Union and has applied for
registration under Regulation (EC) No 1060/2009 (the "CRA Regulation"), although notification of the
corresponding registration decision has not yet been provided by the relevant competent authority.
The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended
(the "Securities Act"), or any state securities law, and may not be offered or sold within the United States or to,
or for the account or benefit of, any U.S. person except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act.
The Notes will initially be represented by a temporary global Note (the "Temporary Global Note"), without
interest coupons, which will be deposited with a common depositary for Clearstream Banking, société anonyme
(Clearstream, Luxembourg) and Euroclear Bank S.A./N.V. ("Euroclear"), on or about 8 July 2011 (the
"Closing Date"). The Temporary Global Note will be exchangeable for interests in a permanent global Note (the
"Permanent Global Note") on or after a date which is expected to be 17 August 2011 (the "Exchange Date")
upon certification as to non-U.S. beneficial ownership. The Permanent Global Note will be exchangeable for
definitive Notes only in certain limited circumstances as described herein. See "Summary of Provisions relating
to the Notes while in Global Form".
An investment in the Notes involves certain risks. See "Risk Factors" for a discussion of certain factors that
should be considered in connection with an investment in the Notes.
Joint Lead Managers
DEUTSCHE BANK
HSBC
ZAGREBAC
KA BANKA D.D.
Co-Managers
ERSTE GROUP
RAIFFEISEN BANK
INTERNATIONAL
7 July 2011

THE REPUBLIC OF CROATIA
i

This Prospectus comprises a prospectus for the purposes of Article 5.3 of Directive 2003/71/EC (the "Prospectus
Directive") and for the purposes of the Luxembourg Act.
The Issuer accepts responsibility for the information contained in this Prospectus. To the best of the knowledge
of the Issuer (having taken all reasonable care to ensure that such is the case) the information contained in this
Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such
information.
The Issuer, having made all reasonable enquiries, confirms that this Prospectus contains all information with
respect to the Issuer and the Notes which is material in the context of the issue and offering of the Notes, that the
information contained in this Prospectus is true and accurate in every material respect and is not misleading,
that the opinions and intentions expressed in this Prospectus are honestly held and that there are no other facts
the omission of which makes misleading any statement herein, whether of fact or opinion.
No person has been authorised in connection with the offering of the Notes to give any information or make any
representation regarding the Issuer or the Notes other than as contained in this Prospectus. Any such
representation or information should not be relied upon as having been authorised by the Issuer or any agency
thereof or the Managers (as defined under "Subscription and Sale"). Neither the delivery of this Prospectus nor
any sales made in connection with the issue of the Notes shall, under any circumstances, constitute a
representation that there has been no change in the affairs of the Issuer since the date hereof.
The Managers make no representation or warranty, express or implied, as to the accuracy or completeness of the
information in this Prospectus. Each person receiving this Prospectus acknowledges that such person has not
relied on any Manager or any person affiliated with any Manager in connection with its investigation of the
accuracy of such information or its investment decision. Each person contemplating making an investment in the
Notes must make its own investigation and analysis of the creditworthiness of the Issuer and its own
determination of the suitability of any such investment, with particular reference to its own investment objectives
and experience, and any other factors which may be relevant to it in connection with such investment.
This Prospectus does not constitute an offer of, or an invitation by or on behalf of the Issuer or any agency
thereof or any Manager to subscribe or purchase, any of the Notes. The distribution of this Prospectus and the
offering of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this
Prospectus comes are required by the Managers to inform themselves about and to observe any such restrictions.
For a description of certain further restrictions on offers and sales of Notes and distribution of this Prospectus,
see "Subscription and Sale".
In this Prospectus, all references to "HRK" and "Kuna" are to the lawful currency for the time being of the
Issuer, all references to "", "EUR", "euro" and "Euro" are to the currency introduced at the start of the third
stage of European economic and monetary union pursuant to the Treaty on the Functioning of the European
Union, and all references to "U.S. dollars", "US$" and "USD" are to the lawful currency for the time being of
the United States of America.
Certain amounts which appear in this Prospectus have been subject to rounding adjustments; accordingly,
figures shown as totals may not be an arithmetic aggregation of the figures which precede them.
IN CONNECTION WITH THE ISSUE OF THE NOTES, DEUTSCHE BANK AG, LONDON BRANCH
AS STABILISING MANAGER (THE STABILISING MANAGER) (OR PERSONS ACTING ON
BEHALF OF THE STABILISING MANAGER) MAY OVER ALLOT NOTES OR EFFECT
TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A
LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS
NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF
THE
STABILISING
MANAGER)
WILL
UNDERTAKE
STABILISATION
ACTION.
ANY
STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE
PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF
BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF
30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE
ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT MUST BE
CONDUCTED BY THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE
STABILISING MANAGER) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.
ii

CONTENTS
Page
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
TERMS AND CONDITIONS OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
SUMMARY OF PROVISIONS RELATING TO THE NOTES WHILE IN GLOBAL FORM . . . . . . . . . . .
18
OVERVIEW OF THE REPUBLIC OF CROATIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
THE ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
FOREIGN TRADE AND INTERNATIONAL BALANCE OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . .
53
MONETARY DEVELOPMENTS AND INTERNATIONAL RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . .
66
PUBLIC FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
PUBLIC DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112
SUBSCRIPTION AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114

RISK FACTORS
The Issuer believes that the following factors may affect its ability to fulfil its obligations under the Notes. Most
of these factors are contingencies which may or may not occur and the Issuer is not in a position to express a
view on the likelihood of any such contingency occurring.
In addition, factors which are material for the purpose of assessing the market risks associated with the Notes
are described below.
The Issuer believes that the factors described below represent the principal risks inherent in investing in the
Notes, but the inability of the Issuer to pay interest, principal or other amounts on or in connection with the
Notes may occur for other reasons which may not be considered significant risks by the Issuer based on
information currently available to it or which it may not currently be able to anticipate. Prospective investors
should also read the detailed information set out elsewhere in this Prospectus and reach their own views prior to
making any investment decision.
FACTORS THAT MAY AFFECT THE ISSUER'S ABILITY TO FULFIL ITS OBLIGATIONS UNDER
THE NOTES
An investment in a developing country such as Croatia is subject to substantially greater risks than an
investment in a more developed country
An investment in a country such as Croatia, which achieved independence in 1991 and whose economy is still in
transition, is subject to substantially greater risks than an investment in a country with a more developed
economy and more developed political and legal systems. Although progress has been made in reforming
Croatia's economy and political and legal systems, the development of Croatia's legal infrastructure and
regulatory framework is still ongoing. As a consequence, an investment in Croatia carries risks that are not
typically associated with investing in more mature markets. Accordingly, investors should exercise particular
care in evaluating the risks involved and must decide for themselves whether, in light of those risks, such
investment is appropriate. Generally, investments in developing countries, such as Croatia, are only suitable for
sophisticated investors who can fully appreciate the significance of the risks involved.
In addition, international investors' reactions to the events occurring in one country sometimes appear to
demonstrate a "contagion" effect, in which an entire region or class of investment is disfavoured by international
investors. Therefore, the Republic could be adversely affected by negative economic or financial developments
in other countries. There can be no assurance that any crises similar to the recent global financial and economic
crisis or the current political turmoil in countries in Northern Africa and the Middle East will not negatively
affect investor confidence in developing markets, including the Republic.
Croatia may not succeed in implementing its proposed economic, financial and other reforms and policies
which may adversely affect the Croatian economy and the Republic's ability to repay principal and make
payments of interest on the Notes
Since declaring independence in 1991, Croatia has undergone substantial political transformation from a
constituent republic in a federal socialist state to an independent sovereign democracy. In parallel with this
transformation, Croatia has been pursuing a programme of economic structural reform with the objective of
establishing a market-based economy through privatisation of state enterprises and deregulation of the economy.
However, this process is not yet complete. Croatia has made progress in the transition to a functioning market-
based economy, but the rebuilding of Croatia's economic and institutional infrastructure to a Western European
standard requires further investment and may take years to complete.
There can be no assurance that the economic and financial initiatives and the reforms described in this Prospectus
will continue, will not be reversed or will achieve their intended aims. Failure of the Government of Croatia (the
"Government") to implement its proposed economic, financial and other reforms and policies may negatively
affect the Croatian economy and, as a result, have a material adverse effect on Croatia's capacity to repay
principal and make payments of interest on the Notes.
The Republic's economy remains vulnerable to external shocks which could have an adverse effect on the
Republic's economic growth and its ability to service its public debt
The Republic's economy remains vulnerable to external shocks, including those stemming from the recent global
financial and economic crisis or the current political turmoil in countries in Northern Africa and the Middle East.
Although in recent years Croatia has made significant gains in stabilising its currency, increasing its GDP,
decreasing inflation and increasing real wages, the recent global financial and economic crisis negatively affected
1

the Croatian economy. During the crisis, Croatia has experienced a decline in GDP and FDI, and an increase in
net lending/borrowing of the consolidated general government. According to the Croatian Bureau of Statistics
("CBS"), Croatia's real GDP contracted by 1.4 per cent. in 2010 (based on preliminary data) and by 5.8 per cent.
in 2009, as compared to GDP growth of 2.4 per cent. in 2008 and 5.1 per cent. in 2007. Net FDI decreased by
63.3 per cent. in 2009 compared to 2008 and by 6.0 per cent. in 2008 compared to 2007. In the first nine months
of 2010 net FDI remained flat compared to the same period in 2009. However, inward FDI decreased by 30.8 per
cent. during 2010, with net FDI remaining stable due to an accompanying 63.5 per cent. fall in outward FDI. In
the first nine months of 2010, net lending/borrowing of the consolidated general government was 3.0 per cent. of
GDP.
Despite the fact that Croatia's GDP growth averaged 4.3 per cent. in real terms between 1994 and 2008, this
growth pattern has not been sustained in 2009 and 2010 and may not be sustainable in the future, as indicated by
serious external imbalances. One of the main drivers of economic expansion in Croatia between 2001 and 2008
was domestic demand, which grew at an average annual rate of 5.9 per cent. Private consumption was boosted by
the expansion of credit and investment was heavily concentrated in private construction. Capital inflows dropped
by 27.1 per cent. in 2009 and this negative trend continued during the first nine months of 2010 as a result of the
global financial and economic crisis, and in particular due to increased risk aversion by international investors
and declining international liquidity, while external debt continued to rise but at a much slower pace. The gross
external debt in euro terms grew from EUR 13.6 billion (53.3 per cent. of GDP) in 2001 to EUR 43.1 billion
(94.9 per cent. of GDP or 267.1 per cent. of exports of goods and services) in 2009. The gross external debt in
euro terms slightly increased in the first nine months of 2010, and amounted to EUR 44.7 billion in comparison
to EUR 44.6 billion as of 31 December 2009. As a reflection of these difficulties, in December 2010 S&P
lowered the Republic's rating from BBB (Outlook Negative) to BBB- (Outlook Negative), citing concerns about
Croatia's fiscal position and external financing.
There can be no assurance that Croatia will return to the growth pattern experienced during 2001 to 2008 given
that it relied heavily on substantial inflows of foreign capital during this period. Even as the global economy
recovers in the future, the positive economic trends of recent years in Croatia may not continue over the longer
term and may reverse. These economic factors could have a material adverse effect on Croatia's capacity to
repay principal and make payments of interest on the Notes and on Croatia's credit rating.
Croatia may not join the European Union by the target date or at all
Croatia commenced negotiations regarding its accession to the EU in October 2005. The Republic's accession
depends on many political and economic factors, including the successful conclusion of ongoing negotiations
with the relevant EU bodies relating to the level of Croatia's harmonisation with EU law, see "Overview of the
Republic of Croatia -- International Relations -- European Union Accession". Croatia is scheduled to join the
EU on 1 July 2013. However, a national referendum among the Croatian population on EU membership is a
prerequisite to accession. There can also be no assurance that Croatia will join the EU by the target date or at all.
In addition, delays or other adverse developments in Croatia's accession to the EU may have a negative effect on
the Republic's economic performance.
Depreciation in the Kuna may adversely affect the Croatian economic and financial condition
A significant portion of Croatia's public external debt and domestic debt is denominated in foreign currencies.
Foreign-currency debt accounts for 70.7 per cent. of total public debt as at 30 September 2010. As of 1 March
2011, Croatia did not have any hedging arrangements in respect of its foreign-currency denominated public debt.
In the event of foreign currency fluctuations, and a devaluation of the Kuna relative to the U.S. dollar or the euro,
the negative impact on the service obligations in respect of the debt denominated in foreign currencies will not be
completely offset by the positive impact on the service obligations in respect of debt denominated in Kuna. Any
significant devaluation of the Kuna may have an adverse effect on the Republic's ability to repay its debt
denominated in foreign currencies, including the amounts due under the Notes.
In addition, as at 31 December 2010, over 85 per cent. of corporate debt and approximately 75 per cent. of
household debt was denominated in, or linked to, foreign currency. Only a small fraction of this debt is hedged.
In 2010, as in 2009, almost all new lending was linked to foreign currencies. Despite the fact that foreign
currency deposits now account for approximately 80 per cent. of all deposits and that large foreign currency
deposits by households reduce currency mismatches at the aggregate level, this does not eliminate macro-level
mismatches and there are likely to be mismatches at the individual level between borrowers and depositors as
well. The devaluation of the Kuna against foreign currencies may negatively affect the capacity of corporate and
household borrowers to repay their debt and as a result adversely affect the financial and economic condition of
Croatia.
2

The further proliferation of the euro in the Croatian economy may adversely affect the CNB's ability to
implement its monetary policies
In recent years, the role of the euro in the Croatian economy and circulation of the euro in Croatia substantially
increased as a result of sizeable euro capital inflows from abroad, including from persons working abroad who
send money to their families in Croatia; the tourism industry, in particular the population's willingness to accept
euro from tourists; and the fact that a majority of corporate and household loans are euro-denominated or euro-
indexed. As the Government's domestic monetary policy mostly impacts the Kuna and has limited impact on
other currencies including the euro, the further proliferation of the euro in the Croatian economy and widespread
use of euro by the Croatian population may undermine the ability of the CNB to implement its monetary policies.
Similarly, the policies of the European Central Bank affecting the euro may indirectly impact the Croatian
economy. Any limitations on the ability of the CNB to implement its monetary policies may have an adverse
effect on the Croatian economy and thus on the ability of Croatia to repay principal and make payments of
interest on the Notes.
The current account deficit may increase
Croatia's current account deficit tripled between 2004 and 2008, mainly due to the widening trade deficit, but has
declined considerably since then. The current account deficit increased by 194.1 per cent. in euro terms from
EUR 1.4 billion (4.3 per cent. of GDP) in 2004 to EUR 4.2 billion (8.8 per cent. of GDP) in 2008. The current
account deficit decreased by 42.9 per cent. in euro terms in 2009 and amounted to EUR 2.4 billion (5.3 per cent.
of GDP). The decrease was mainly attributable to a narrowing of the deficit in trade in goods. The decreased
deficit resulted from the fact that the decline in imports was greater than the decline in exports which was, in
turn, due to a decline in the negative trade balance in road vehicles and petroleum and petroleum products as well
as a surplus in trade in other transport equipment. In 2010, the current account produced a deficit of EUR
0.6 billion, a 75.8 per cent. decrease compared to 2009. Unlike in neighbouring countries, Croatia's exports as
percentage of GDP remained flat over the past decade while imports have grown steadily as a result of rising
consumption. As a result, the trade deficit increased by 62.8 per cent. from EUR 6.9 billion in 2004 to EUR
11.2 billion in 2008. However, due to the effects of the global financial and economic crisis on both domestic and
foreign demand, the trade deficit subsequently decreased by 31.5 per cent. in 2009 compared to 2008 and
amounted to EUR 7.7 billion. This trend continued in 2010, with the trade deficit decreasing further by 19.1 per
cent. to EUR 6.2 billion from EUR 7.7 billion in 2009. The decrease in the trade deficit and corresponding
decrease in the current account deficit in 2009 are largely attributable to imports falling at a more rapid pace than
exports as a result of decreased private consumption due to slowing economic activity. Similarly, in 2010, the
falling current account deficit was caused by a lower trade deficit, but this time due to rising exports while
imports stagnated. Since economic activity is expected to pick up in the near future, the decreases in the current
account and trade deficits may not be sustainable and may reverse. In addition, the export sector has benefited
little from the strong capital inflows (including foreign direct investment) experienced in recent years as most
capital inflows were used in consumption and non-tradable sectors such as construction, real estate and wholesale
and retail trade, resulting in increased imports and a widening current account deficit. The existing current
account deficit and any future increases therein may have an adverse effect on the Croatian economy and thus on
the ability of Croatia to repay principal and make payments of interest on the Notes.
If government revenue decreases, some or all of the Government's expenses continue to rise, and state-owned
enterprises' dependence on public finances is not reduced, Croatia may not be able to service its public debt
and, as a result, to repay principal and make payments of interest on the Notes
According to the plan for 2011, general government revenue is expected to decrease from HRK 124 billion in
2010 to a projected HRK 123 billion in 2011. The decrease in revenue is due to the abolition of the temporary
changes to the tax system during the crisis which bolstered revenues by approximately HRK 1.5 billion in 2010,
as described under "Public Finance -- Taxation", changes in the personal income tax regime and the fact that no
significant revenue is expected from privatisation in 2011. The Republic also faces growing expenses relating to
public wages, social benefits and interest payments, which in the aggregate represented on average 26 per cent.
of Croatia's GDP between 2005 and 2009 and 28.8 in 2010. Costs relating to the healthcare system increased by
51.7 per cent., from HRK 13.7 billion in 2005 to HRK 20.7 billion in 2010. Expenses relating to pensions
increased by 28.9 per cent. from HRK 26.7 billion in 2005 to HRK 35.1 billion in 2010. In the absence of
adequate reform, the risk of increases in expenses relating to pensions and healthcare over the long-term is
compounded by the fact that the old-age dependency ratio (the proportion of people aged 65 or older compared to
the working population (people aged 15 to 64)), which increased from 1:0.252 in 2005 to 1:0.257 in 2009, may
continue to rise. Expenses related to general government subsidies decreased from HRK 6.2 billion to HRK
5.9 billion between 2005 and 2010 but still remain relatively high.
3

Without sufficient structural reforms aimed at reducing the dependence of state-owned enterprises on public
finances and at fostering greater economic efficiency through broader private sector participation, revenue raising
measures could prove inadequate to cover the continued increases in public debt and interest payments. These
revenue raising measures could also be more difficult to implement due to other large-scale government
initiatives in 2011, including the 2011 Census and the next parliamentary elections expected to take place in
November 2011. As a result, the primary deficit could become greater and debt servicing in turn more
demanding. Government payment capacity may become further affected by economic cyclical trends and the risk
of a delayed recovery of key economic sectors.
Taken as a whole, reduced revenues, coupled with increasing expenses related to public wages, social benefits,
interest payments, healthcare system, pensions and subsidies, may adversely affect Croatia's ability to repay
principal and make payments of interest on the Notes.
There can be no assurance that Croatia's credit rating will not change
The long-term foreign and domestic currency debt of the Republic is currently rated BBB- (Outlook Negative) by
S&P and Baa3 (Outlook Stable) by Moody's. Fitch has assigned a rating of BBB- (Outlook Negative) to long-
term foreign currency debt and BBB (Outlook Negative) to domestic currency debt. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any
time by the assigning rating agency. In December 2010, S&P lowered the Republic's rating from BBB (Outlook
Negative) to BBB- (Outlook Negative), citing concerns about Croatia's fiscal position and external financing.
There can be no guarantee that the Republic will not experience further credit downgrades. A deterioration in any
of the factors, or the materialisation of any of the risks, discussed herein may contribute to further credit rating
downgrades which could result in a sub-investment grade rating of the Notes. In turn, any adverse changes in an
applicable credit rating could adversely affect the trading price for the Notes.
Private Croatian borrowers may not be able to repay or reschedule their debt which may have a material
adverse effect on the Croatian economy
Private debt in Croatia grew rapidly in recent years as corporate and household sectors accumulated a heavy debt
burden. Household debt in Croatia as a share of GDP is one of the highest among Central and Eastern European
countries. Non-publicly guaranteed private sector external debt relates almost entirely to foreign borrowing by
the corporate sector and banks. Non-publicly guaranteed private sector external debt grew strongly in recent
years and amounted to EUR 32.1 billion (70.0 per cent. GDP) at the end of 2010, as compared to
EUR 32.4 billion (71.0 per cent. of 2009 GDP), EUR 29.7 billion (62.1 per cent. of 2008 GDP), EUR 23.6 billion
(54.4 per cent. of 2007 GDP), EUR 20.8 billion (52.5 per cent. of 2006 GDP) and EUR 17.0 billion (47.1
per cent. of 2005 GDP) at 31 December 2009, 2008, 2007, 2006 and 2005, respectively. These figures do not
include the effects of round-tripping transactions, i.e., transactions which involve Croatian equity investment
abroad to companies which then lend back to the investing company in Croatia. See "Foreign Trade and
International Balance of Payments -- Capital and Financial Account". Failure of private borrowers to repay or
reschedule their debt may have a material adverse effect on the Croatian economy. In turn, this may affect
Croatia's ability to repay principal and make payments of interest on the Notes.
Foreign banks may diminish or discontinue their support of their subsidiaries operating in Croatia
As of 31 December 2010, foreign banks owned approximately 90.3 per cent. of banks' assets in Croatia. Foreign
banks may rebalance their global loan portfolio in a manner adversely affecting Croatia as a result of events
related or unrelated to Croatia. In addition, foreign banks may decrease funding to their subsidiaries operating in
Croatia due to actual or perceived deterioration in asset quality, particularly in the event of a weaker than
expected economic performance. As a result of these or other factors, or other potential shocks, foreign banks
may revise their business strategies in, or relating to, Croatia and in particular their decision to fund their
subsidiaries in Croatia. This may lead to, among other things, a loss of confidence in the Kuna which, in turn,
may result in significant devaluation of the Kuna. Resulting balance sheet mismatches may negatively affect the
Croatian economy and, as a result, have an adverse effect on Croatia's capacity to repay principal and make
payments of interest on the Notes.
Corruption and money laundering issues may hinder the growth of the Croatian economy, delay or foreclose
EU accession and otherwise have a material adverse effect on Croatia
Independent analysts have identified corruption and money laundering as problems in Croatia. In the 2010
Transparency International Corruption Perceptions Index, Croatia was ranked 62 out of 180 countries under
review (indicating that there were 61 countries with lower perceived levels of corruption). In 2008, the Republic
commenced a reform of the judicial system in order to combat corruption and restore confidence in the judicial
4

system. See "Overview of the Republic of Croatia -- Constitution and Government Structure -- The Judicial
System". The Act on Prevention of Money Laundering and Financing of Terrorism (Official Gazette of Republic
of Croatia No. 87/08, the "Act") came into force on 1 January 2009 and is aimed at harmonising Croatian law on
prevention of money laundering and financing of terrorism with the provisions of the Third EU Money
Laundering Directive (Directive 2005/60/EC). However, there is no certainty as to the success of these measures.
Any future allegations or evidence of corruption or money laundering in Croatia may have an adverse effect on
the Croatian economy, in particular on Croatia's ability to attract foreign investment, and thus could negatively
affect Croatia's ability to repay principal and make payments of interest on the Notes.
Croatia's legal system is not fully developed and presents greater risks and uncertainties than a more
developed legal system
Since Croatia declared independence in 1991, the Croatian legal system has been developing to support the
transition to a market-based economy. New laws have been introduced and revisions have been made with
respect to, amongst others, company, property, competition, securities, labour and taxation laws in order to
harmonise them with EU laws. However, the Republic's legal system remains in transition and is therefore
subject to greater risks and uncertainties than a more mature legal system. In particular, risks associated with the
Croatian legal system include: (i) potential inconsistencies between and among the Constitution and various
laws, presidential decrees, governmental, ministerial and local orders, decisions, resolutions and other acts;
(ii) provisions in the laws and regulations that are ambiguously worded or lack specificity and thereby raise
difficulties when implemented or interpreted; (iii) difficulty in predicting the outcome of judicial application of
Croatian legislation; and (iv) the fact that not all Croatian resolutions, orders and decrees and other similar acts
are readily available to the public or available in an understandable, organised form.
These and other factors that may impact Croatia's legal system make an investment in the Notes subject to
greater risks and uncertainties than an investment in a country with a more mature legal system.
The Notes are governed by English law and the Issuer has submitted to the non-exclusive jurisdiction of the
courts of England to settle any disputes that may arise out of or in connection with any Note. In respect of any
proceedings between: (i) the Issuer and a Croatian natural or legal person (which proceedings also include a
non-Croatian natural or legal person); or (ii) the Issuer and a non-Croatian natural or legal person, a Croatian
court will recognise and give effect to the choice of English law as the law governing the Notes if the merits of
the dispute in question have an international element. In respect of recognition and/or enforcement of an English/
foreign court judgment, Croatian courts may refuse to recognise such judgments only in certain cases according
to the provisions of the Croatian Law on Resolving Conflicts of Law with Other Countries' Laws and
Regulations in Certain Matters (Official Gazette No. 51/1991). Once recognised, the foreign judgment is equal to
the judgment of a Croatian court and is fit for enforcement.
The uncertainties relating to the Croatian judicial system could have a negative effect on the economy and
thus on the ability of Croatia to repay principal and make payments of interest on the Notes
The independence of the judicial system and its immunity from economic and political interference in Croatia
remain questionable. The application and interpretation of the Constitution remain complicated and, accordingly,
it is difficult to ensure smooth and effective resolution of discrepancies between the Constitution and applicable
Croatian legislation on the one hand and among various laws of Croatia on the other hand.
The court system is underfunded compared to more mature jurisdictions. As Croatia is a civil law jurisdiction,
judicial decisions under Croatian law generally have no precedential effect and the courts are generally not bound
by earlier court decisions taken under the same or similar circumstances. This may result in an inconsistent
application of Croatian legislation to resolve the same or similar disputes. Furthermore, to date only a small
number of judicial decisions have been publicly available and, therefore, the role of judicial decisions as
guidelines in interpreting applicable Croatian legislation to the public at large is generally limited.
In 2008, the Republic commenced a reform of the judicial system. See "Overview of the Republic of Croatia --
Constitution and Government Structure -- The Judicial System". Despite these efforts, judicial decisions in
Croatia remain difficult to predict. In addition, court orders are not always enforced or followed by law
enforcement institutions. The uncertainties of the Croatian judicial system could have a negative effect on the
economy and thus on the ability of Croatia to repay principal and make payments of interest on the Notes.
Croatia may not be able to refinance its debt on favourable terms or at all
The Republic has substantial amounts of internal and external public debt. As at 31 December 2010, Croatia's
general government debt excluding government guarantees was HRK 138.0 billion (41.3 per cent. of GDP), of
which HRK 89.8 billion (65.1 per cent.) was internal debt and HRK 48.2 billion (34.9 per cent.) was external
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debt. As of 31 December 2010, the average maturity of the public external outstanding debt was 5.9 years
whereas the average maturity of the public internal outstanding debt was 4.9 years. Any deterioration in
financing conditions as a result of market, economic or political factors, which may be outside the Republic's
control, may jeopardise the debt repayment ability of the Republic and adversely affect the Republic's ability to
implement its economic strategy and reforms.
Croatia depends on the tourism industry as a significant source of revenue and any deterioration in the
tourism industry may adversely affect the Republic's economy and its ability to service its debt
It is estimated that approximately 10 million tourists visit Croatia annually. Tourism contributes substantially to
Croatia's GDP. Revenue generated by the tourism industry depends on various factors including consumer
spending power, which may be adversely affected by economic downturns, and public perception of the
attractiveness and safety of a potential tourist destination.
Negative developments affecting these and other factors may adversely affect the tourism industry and have
negative effects on the Croatian economy and thus on the ability of Croatia to repay principal and make
payments of interest on the Notes.
Deterioration in Croatia's relations with its major energy suppliers may adversely affect the supply of energy
resources and therefore have a negative effect on the Croatian economy
Croatia's economy depends on trade flows with certain other countries largely because Croatia imports a large
percentage of its energy requirements. If bilateral trade relations with Croatia's major energy suppliers were to
deteriorate or if supplies of oil or natural gas to Croatia were to be restricted or if the price of oil were to
significantly increase, the Republic's economy could be adversely affected. In addition, an increase in the price
of oil or natural gas could adversely affect the pace of economic growth of Croatia. Furthermore, although higher
gas prices have increased pressure for reforms in the energy sector, for modernisation of major energy-
consuming industries of Croatia through the implementation of energy-efficient technologies and for the
modernisation of production facilities, there can be no assurance that these reforms and modernisations will be
implemented or will succeed. Any major changes in relations with major energy suppliers to Croatia, in
particular any such changes adversely affecting supplies of energy resources to Croatia, may have adverse effects
on the Croatian economy.
Official economic data may not be accurate
Although a range of government ministries including the Ministry of Finance, along with the Croatian National
Bank ("CNB") and the CBS, produce statistics on Croatia and its economy, there can be no assurance that these
statistics are as accurate or as reliable as those compiled in more developed countries. Prospective investors in
the Notes should be aware that figures relating to Croatia's GDP and many other aggregate figures cited in this
Prospectus may be subject to some degree of uncertainty and may not be prepared in full accordance with
international standards. Furthermore, standards of accuracy of statistical data may vary from ministry to ministry
or from period to period due to the application of different methodologies. In this Prospectus, data are presented
as provided by the relevant ministry to which the data is attributed, and no attempt has been made to reconcile
such data to the data compiled by other ministries or by other organisations, such as the International Monetary
Fund (the "IMF") or World Bank. Since 2005 Croatia has produced data in accordance with the IMF's Special
Data Dissemination Standard. There can be no assurance, however, that this IMF standard has been fully
implemented or correctly applied. The existence of a sizeable unofficial or unobserved economy may also affect
the accuracy and reliability of statistical information. Prospective investors should be aware that none of the
statistical information in this Prospectus has been independently verified.
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