Banks threaten legal action against Croatia's Swiss franc loan plan

By bne IntelliNews September 3, 2015

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Croatia’s plan to convert Swiss franc loans into euro loans violates European laws and bilateral investment treaties, according to a group of international banks.

The banks' statement on September 3 follows the announcement by the Croatian government that it is preparing a bill to convert loans denominated in Swiss francs into euros, with part of the principal being written off and all the costs being borne by the banks.  The government, in return, would recognise those losses against tax. The move came months before general elections are held and is expected to increase support for the ruling SDP party, which is lagging behind the opposition HDZ party in polls.

“We feel seriously concerned about these developments and the statements given by the Croatian government,” Erste Group, UniCredit, Sberbank, Raiffeisen Bank International and Hypo Group Alpe Adria said in a joint statement.

“A forced conversion without considering the income situation or the debt service capability of the customer is a severe retroactive interference with existing contracts,” the banks noted, adding that they will seek swift bilateral discussions with the Croatian government.

Loans in Swiss francs became popular in the Adriatic country in the 2000s due to the attractive low interest rates. However, following the Swiss central bank’s surprise decision to abandon its ceiling of CHF1.20 to the euro in January, the cost of the loans soared for the 60,000 Croatians who took them out.

The Croatian government fixed the Swiss franc’s exchange rate at 6.39 kuna for a year. That was the rate before the Swiss central bank’s decision. Negotiations between loanholders, banks and state institutions on a permanent solution have been dragging for months and have not yielded any result.

At the end of last year, Swiss franc-denominated loans made up 16% of all lending in the country and some 38% of all mortgage loans were denominated in the Swiss currency, according to data from the Croatian central bank.

The foreign banks' move echoes a similar one in Poland at the end of August. Foreign bank owners, including US giant General Electric (GE) and Germany’s Commerzbank, threatened legal action against proposed legislation that would allow for the conversion of foreign currency loans into zloty at market rates.

The Croatian banking system reported a pre-tax profit of HRK1.48bn (€195.9mn) in the first six months of the year, down from HRK1.57bn a year before. The share of bad loans held by the banking sector rose to 17.3% at the end of June from 17.14% at the end of March.

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