Three days into Croatia's EU membership, Brussels is likely to be alarmed by a court order to several Eurozone-owned banks to swap Swiss franc mortgage loans into kuna. Analysts suggest the move could cost the banks close to €1bn, and also worry about the large volume of euro debt in the country.
The Zagreb commercial court ruled against eight foreign-owned bank subsidiaries in a case brought by Potrosac, a consumer protection group, on behalf of 100,000 citizens who had in the past decade taken loans - either denominated or indexed in Swiss francs - according to Reuters. The banks were found guilty of failing to explicitly inform clients of all the risks associated with borrowing in foreign currency and variable interest rates.
If the ruling is confirmed - the lenders have the chance to appeal - the banks will have to recalculate the principal for each loan in kuna and offer it to the client with a fixed interest rate. Neither the exchange rate to be used, nor the fixed interest rate, has been set, but will reportedly be agreed on a client-by-client basis.
That clearly opens up huge risks for the banks involved, which includes Zagrebacka Banka and Privredna Banka - units of Italy's Unicredit and Intesa Sanpaolo, respectively; Austrian lenders Erste, Raiffeisen and Hypo Bank; Hungary's OTP; Splitska Banka - owned by France's Societe Generale; and the local subsidiary of Russian state giant Sberbank. None offered comment - a stance also taken by the regulator, the Croatian National Bank.
Delivering the ruling, Judge Radovan Dobronic said the banks had violated the interest of their clients by "changing the interest rates in an untransparent manner," reports Reuters. "This was against the law on consumer protection ... such behaviour of banks is forbidden in the future," he added.
The story is a familiar one across CEE, with the likes of Poland and Hungary also facing significant issues over foreign currency mortgages taken out in the boom years ahead of the crisis. Swiss franc-denominated or -indexed loans in Croatia are currently worth about HRK25bn (€3.3bn) according to IHS Global Insight - equivalent to just over 10% of total banking-sector credit. That share was closer to 20% in 2007-08, as households rushed to take advantage of the sagging value of the Swiss currency and boom in emerging market currencies.
However, once the crisis hit, the Swiss france developed as a haven, and between 2008 and 2011 the kuna lost about 40% of its value against the franc. Citing higher costs of capital and interest rates on money markets, the banks also raised interest rates. That saw the monthly installments of unhedged Croatian borrowers surging - by 50% on average - leading to many defaults.
Little wonder that the local press has heralded the ruling. However, the giant Eurozone groups that own many of the banks will inevitably rush to point out to EU policymakers the similarities to the harsh treatment handed out to them across the northern border in Hungary, where they were forced to shoulder huge losses in a similar scheme to convert foreign currency debt pushed through by the government. Budapest has also inflicted high taxes on the banks, which has seen it in almost constant conflict with Brussels over the past two years. Meanwhile, lending has almost dried up as the banks cut exposure in a market they complain is beset by the risks of erratic policy.
That is a risk Croatia clearly faces should they suffer similar damage there. "Despite the lack of detail on how the new rates will be set, one possibility is that these loans will be repaid at their original exchange rate," warns Oliveira da Silva at IHS Global Insight. "If so, then the lenders involved in the case would face considerable losses - we estimate these could be worth up to about HRK7bn (€933m), equivalent to around 1.7% of total sector assets. The situation would be significantly costlier for the sector if this case leads to other similar actions on lending denominated or indexed in euro."
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