Oct. 17 (Bloomberg) -- Croatian central bank Governor Zeljko Rohatinski said steps are being taken to prevent foreign banks from withdrawing excessive capital from local subsidiaries.

Should the debt crisis in the euro area worsen and foreign banks try to use capital from its Croatian units, the central bank will respond with “prepared measures,” Rohatinski told state TV late yesterday.

Croatia’s two biggest banks are subsidiaries of Italian financial companies. Zagrebacka Banka d.d., the country’s biggest lender by market value, is owned by UniCredit SpA, while Privredna Banka d.d. is a unit of Intesa Sanpaolo SpA

Rohatinski also said Croatia needs to turn to domestic sources of financing as capital inflows from abroad are expected to decrease as the crisis in euro-region continues.

“For this we need painful cuts,” Rohatinski said, Measures “have been overdue since 2008, but in this country there was not enough courage and strength to execute them.”

Croatia, which is preparing to become the European Union’s 28th member in July 2013, is still struggling to recover from a two-year recession. The economy expanded 0.8 percent in the second quarter from a year earlier, after a 0.8 percent contraction in the first three months. Foreign direct investment totaled $6 billion in 2008, the last pre-crisis year, before declining to $583 million in 2010.

--Editors: James M. Gomez, Douglas Lytle

To contact the reporter responsible for the story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for the story: James M. Gomez at jagomez@bloomberg.net