On the second day of the trial of former PM Sanader for war profiteering in the Hypo bank case, the court continued questioning witnesses and the first to take the witness stand was former PM Nikica Valentic.

Valentic's extensive testimony began with a description of the situation in Croatia in 1994 when, he said, the country was faced with an economic breakdown and the monthly inflation rate was as high as 40 percent.

Even though the main task of Valentic's government was economic recovery, government bodies also discussed the need to seek loans to purchase facilities for Croatia's diplomatic missions abroad.

"The market was unregulated. There were no foreign banks, interest rates ranged from 1.5 to 2 percent for loans issued by domestic banks, so the annual interest rate would have been 15-20 percent," said Valentic.

He said that the issue of embassy buildings was raised by the then foreign minister Granic who was in favour of seeking loans to purchase them. The government then sought the consent of the finance ministry, and it was agreed that a loan be taken for the purchase of embassy buildings, with a repayment period not shorter than 7-8 years.

Valentic recalled having heard at the time about the Hypo bank, a small bank from an Austrian province, which offered interest rates on loans of below 10 percent, which he said was very favourable considering the situation in Croatia where interest rates on loans could be as high as 20 percent.

Answering a question by Sanader's defence counsel, Valentic said that the loan agreement could not have been signed by anyone else but the foreign minister, based on a decision signed by the prime minister. He added that he was confident the decision on the loan in question was signed by Granic.

Asked if former Austrian Foreign Minister Alois Mock had any role in the process of obtaining the loan, Valentic said that he met with him on several occasions, but that Mock never mentioned anything to him in that regard.

"I can't remember hearing rumours afterwards that he had intervened, but he did not confirm anything to me directly. I'm sure that the minister, the president and the deputy minister (Sanader) did not speak to me about it," he said.

Sanader is charged with having taken, at the time when he was Croatia's deputy foreign minister, 3.6 million kuna in kickbacks for a loan the Hypo bank granted Croatia in the mid-1990s. After the arraignment, he dismissed the accusations with indignation. His defence counsel have said that they will prove that the main negotiator with the Hypo bank was Granic, who is to testify in the case on November 11.