Banks in Croatia, Montenegro take legal action over Swiss franc loan conversion laws

Banks in Croatia, Montenegro take legal action over Swiss franc loan conversion laws
By Akin Nazli in Croatia September 16, 2016

Italian lender UniCredit, the owner of Croatia’s largest lender Zagrebacka Banka, has filed the first lawsuit against the country's Swiss franc local conversion programme, Reuters reported on September 15.

The case was filed the day after the Montenegrin arm of Addiko Bank (formerly Hypo Alpe-Adria Bank) said it would resort to international arbitration over amendments to the law on the conversion of Swiss franc loans.

Many Central and Southeast European lenders provided Swiss franc-denominated loans during the 2000s to take advantage of Swiss interest rates. However, since the Swiss central bank ended the franc's peg against the euro in January 2015, borrowers have been suffering. In response, several governments from the region have adopted legislation forcing banks to convert their customers' Swiss franc loans. 

Caretaker Foreign Minister Miro Kovac confirmed on September 15 that the Croatian government was facing its first lawsuit for forcing local banks to convert Swiss franc loans into euros, according to Reuters. "The first lawsuit has arrived. We will try to find a solution that will not burden our budget and will protect the citizens who took such loans," Kovac said. Kovac also criticised the former SDP-led government for introducing the loan conversion law.

Also in Croatia, Addiko Bank has said it is considering every legal means at its disposal while Raiffeisenbank Austria said local banks had contested the constitutionality of Croatia's Consumer Credit Act at the Constitutional Court and that they had notified the government about the dispute as a preparation for arbitration proceedings against Croatia at the International Center for the Settlement of Investment Disputes in Washington, according to About Croatia.

Croatia is under pressure on several fronts regarding its Swiss franc loan conversion programme, approved in September 2015, which stipulates that the costs will borne by banks. It was adopted just two months before the November 2015 elections while the Social Democratic Party-led government was still in power. The move is likely to cost financial institutions around HRK8bn, the central bank has estimated.

According to the legislation, loans denominated in Swiss francs should be converted into euro loans at the exchange rate applicable at the date the CHF loans were taken out. The new interest rate should be equal to the rate that would have been charged by the bank for a loan denominated in euros and not in francs.

A spokesperson from the European Commission (EC) confirmed on August 31 that the Commission had accepted the Croatian authorities’ request to extend its two-month deadline to respond to a warning on its loan conversion programme until September 17.  The letter was a last warning and it is expected to be followed with infringement procedures.

More than 90% of Croatian lenders are owned by EU-based foreign lenders, according to Reuters.

Croatia held snap elections on September 15 and the new government’s first task in the economy field will be to deal with legal cases regarding the loan conversion programme. The EC is expected to wait until a new government is formed, but it is expected to be strict in its position since Poland’s parliament is currently discussing its own Swiss franc loan conversion programme. 

Finance Minister Zdravko Maric said on April 5 that the Croatian central bank had already completed the conversion of more than 50,000 CHF-denominated loans, 93.6% of the total. Slightly more than 5,000 loans, 6.4% of the total, were in the process of conversion, which was expected to be completed soon, according to Maric.

The side effects of the Swiss loan conversion programme continue. Annual loan growth in Croatia has been on a continuous downward trend since November 2012. The comparatively sharp drop in lending on the annual level was partly due to the conversion of Swiss franc-pegged loans to euro loans or the write-off of such loans and further household deleveraging.

The Montenegrin parliament adopted a bill last year according to which all individuals were allowed to convert their Swiss franc loans to euro at an annual interest rate of 8.2%, as thousands of Montenegrins were negatively affected by the decision of the Swiss central bank to abandon its ceiling of Swiss franc against the euro in January 2015. Montenegro’s parliament later adopted amendments to the bill on the conversion of Swiss franc loans into euro at a session on September 5, 2016. 

Addiko Bank, the only Montenegrin bank to have issued Swiss franc loans, is now challenging the law in Montenegro. “Addiko Bank AG will seek international arbitration on the law for conversions of Swiss franc loans, including all its amendments,” the bank’s spokeswoman Mina Vojinovic told bne IntelliNews by email.

Elsewhere in the region, the Hungarian government launched a loan conversion programme in 2014. Another EU member, Poland, is still discussing its loan conversion programme.