Romania’s Constitutional Court (CCR) has rejected a law under which Swiss franc loan debtors would have been given the right to convert their loans at the exchange rate prevailing on the date that the loan contract was signed.
The decision will be welcomed by banks, though debtors are still able to walk away from their mortgages if they give their properties to their lenders.
The bill on Swiss franc loans conversion was challenged last year, before promulgation, by the previous government of technocrats led by then Prime Minister Dacian Ciolos.
CCR president Valer Dorneanu invoked two legal grounds for the court's decision: the different versions endorsed by the two chambers of the parliament, and the fact that the bill breaches “certain European directives”. He did not specify which directives the law breaches. The detailed justification of the decision will be released later.
Dorneanu said the fact that the Chamber of Deputies was the “decision maker” does not justify the form of the bill being radically different from that endorsed previously by the Senate.
In contrast to the text endorsed by Senators, the Chamber of Deputies unanimously endorsed the Swiss francs loans conversion bill in the form advocated by debtors and criticised by banks, namely at the exchange rate prevailing at the date of the contract. Under the form endorsed by Senators, the conversion would have been done at the exchange rate prevailing at the date of the conversion.
The expert committee of the Chamber of Deputies also removed the CHF250,000 cap on the size of the loans subject to the bill, one of two provisions suggested by the government. The other limitation, 50% indebtedness, was also removed by the deputies.
This was the second law on bank loans drafted with a visibly populist agenda, after the parliament had endorsed the debt discharge bill, which protects debtors from further claims by banks after their collateral is given to the bank.
The CHF conversion bill has been strongly criticised by the banking sector and the central bank. The law would have cost banks around €560mn, or 0.6% of the banking system’s assets, the central bank claimed.
Speaking at a conference organised by Coface corporate rating company at the time the law was endorsed, central bank governor Mugur Isarescu slammed the bill, saying that he did not expect to live in times when “contractual discipline is irrelevant”. However, he admitted that the risks should be shared between banks and debtors and that “stability requires bankers’ benevolence, meaning that banks ought to sit on the same table with customers and negotiate.
On a pragmatic note, Fitch Rating said banks could afford the loss and the bill would not harm their ratings. “This [potential loss incurred by banks] is equivalent to around 50% of the sector's annualised 2016 net profit, based on 1H16 data. We understand that this estimate does not take into account any reserves already set aside by banks against the CHF portfolios. The actual figure could well come in below the estimate,” Fitch said.
Most of the CHF loans (90%) were extended to households in 2005-2009, before the financial crisis. The CHF’s sharp strengthening in January 2015 pushed debtors into deep problems, which had social repercussions and led to debtors blaming banks for their aggressive selling of risky financial products.
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