The Croatian government plans to freeze the exchange rate of the Swiss franc against the Croatian kuna for one year, in order to protect citizens with loans in the Swiss currency, Croatian Prime Minister Zoran Milanovic said on January 19.

According to Milanovic, the exchange rate will be fixed at HRK6.39 to the franc, if the planned amendment to the law on consumer loans is approved by the parliament. This was the exchange rate immediately before the Swiss central bank’s surprise decision to abandon its ceiling of CHF1.20 to the euro on January 15.

The Swiss franc has been trading at around HRK7.6 in the days since the franc’s peg to the euro was scrapped.

Financial institutions will bear the cost of the exchange rate freeze, Milanovic told a press conference following meetings with the finance ministry, the Croatian central bank and commercial banks, according to the Croatian government website.

"Over the next year we can sit down to talk about converting loans pegged to the franc into kuna value but that will require the consent of the Croatian National Bank because that is not exclusively in the government's authority," Milanovic added.

Loans in Swiss francs in Croatia amounted to some HRK23.7bn (€3.1bn) at end-September, of which the majority were mortgage loans. According to civil society organisation Franak, quoted by news agency Hina, banks have extended 60,000 loans denominated in the Swiss currency, but the franc’s strengthening will impact up to 300,000 Croatians among the country’s total population of 4.2mn.

Many of the loans were issued before the start of the international financial crisis in 2008. In July 2013, a Croatian court ordered eight commercial banks to recalculate kuna loans indexed to the Swiss franc, on the ground they had overcharged borrowers, following a lawsuit filed by consumer group Potrosac.

Milanovic’s decision to freeze the Swiss franc exchange rate was expected as 2015 is an election year in Croatia, with parliamentary elections to be organised in the second half of the year. Presidential elections in December 2014 and January 2015 resulted in a shock defeat for incumbent Ivo Josipovic to Kolinda Grabar-Kitarovic, the representative of Croatia’s main opposition party. A large number of Croatians, disillusioned with the political establishment, cast their votes for political outsider Ivan Sincic in the first round of voting.

The presidential election was seen as an indicator of public sentiment ahead of this year’s parliamentary election. Josipovic’s defeat does not bode well for Milanovic’s ruling Social Democratic Party, which may struggle to attract voters given the country’s lengthy recession and an unemployment rate that is among the highest in the European Union.

Croatia is one of several Central and Southeast European countries hit by the Swiss central bank’s decision. Poland, where Swiss franc loans make up 14.6% of outstanding loans, is believed to be the most exposed economy. In Hungary, which had the highest level of CHF borrowing, Prime Minister Viktor Orban’s government pushed through a programme converting foreign exchange loans into forints. Meanwhile, in Romania the total number of CHF loans is relatively small and concentrated at a handful of banks, but the government is considering changes to the personal bankruptcy bill to support borrowers.