Raiffeisen Bank International (RBI) has argued that since most mortgage loans in Romania are in the portfolios of foreign banks, the damage generated by the debt discharge law represents discrimination against foreign investors since they have been disproportionately affected, according to a notification sent by RBI to Romania’s government as a preliminary step ahead of the formal launch of international arbitration. Romania has breached the bilateral treaty signed with Austria for the protection of foreign investors, RBI argued.

RBI says that the debt discharge law causes losses to banks and changes the terms of contracts signed in the past. Under the bill, creditors can give their properties (collateral) to banks in exchange for the termination of the contract even when the market value of the property is below the principal of the loan, the bank explains.

Although the line of reasoning against the law - namely retroactivity and the losses caused to banks - is relevant and will be reviewed this autumn by the Constitutional Court following multiple notifications, the breach of the treaty invoked by RBI is not straightforward. The losses incurred by Romanian and foreign banks are proportional to their exposure to the mortgage market hence the claim of discrimination is at least debatable.

The notification is a necessary step before the initiation of action in international courts such as the World Bank’s ICSID, based on bilateral treaties signed by the country for the protection of foreign investors. Foreign banks warned last year that they were considering suing the state if the law was enacted. 

Romanian banks have already challenged the debt discharge bill in local courts and the Constitutional Court is expected to evaluate their claims this autumn. Banks first had to challenge the provisions of the law through the ordinary courts, which in turn sent the issues related to the potential conflict of the law with the constitution to the Constitutional Court.

Raiffeisen Bank Romania has built €42.5mn provisions for the negative effects of the debt discharge law, the bank announced in an August 18 press release along with its H1 financial results.