Spiteful Bank Bashing Evokes Yawn as Investors Return to Croatia

  • Forced Swiss-loan conversion is `good for the economy'
  • Landesbank Berlin Investment is buying more Croatian bonds

As another eastern European leader rails against malicious lenders and forces them to hand hundreds of millions of dollars to customers in compensation, investors are showing signs of bank-trauma fatigue.

After Hungary drove banks into the red with extra taxes and laws demanding they convert Swiss-franc mortgages into the local currency, and Poland’s president championed similar measures, Croatia is the latest to stir up trouble in the region. Blaming "spiteful" banks for wrecking a government debt auction, Finance Minister Boris Lalovac warned this month of untold measures if they don’t start buying again.

Croatia is forcing banks to cover the cost of switching household loans from francs at preferential exchange rates before elections. The governing party of Prime Minister Zoran Milanovic lags in opinion polls behind an opposition that has dominated since the former Yugoslav republic’s independence. Yet in terms of investor reaction, there’s a difference -- or rather, indifference.

“It’s negative for banks but good for the economy longer-term,” Dmitri Barinov, a money manager overseeing $2.6 billion for Union Investment Privatfonds GmbH in Frankfurt, said Friday. He’s staying overweight on Croatian Eurobonds, saying the loan revamp will make the nation’s finances more resilient to foreign-currency swings. “It’s taking away a vulnerability.”

While the government’s Eurobonds lost the most among the European Union’s eastern nations in the two weeks to Oct. 2, the securities have been recovering lately with the rest of the emerging markets after the Federal Reserve delayed raising interest rates. The yield on Croatia’s 2024 dollar bonds slid 16 basis points last week and traded at 5.03 percent on Monday as of 4:38 p.m. in the capital Zagreb, or 114 basis points above similarly rated Hungarian debt.

Falling Yields Still Higher Than Hungary
Falling Yields Still Higher Than Hungary

Such a large premium over its neighbor is unjustified, according to Timothy Ash, a credit strategist at Nomura International Plc in London. Croatia’s return to economic growth this year after six years of contraction and the narrowing budget deficit are among “a number of improving trends,” he said by e-mail last week.

The Swiss-loan “issue had to be addressed because it had dragged on too long and hung over the market and the banks,” Ash said. “As in Hungary, the resolution will be, in the end, accepted grudgingly by the banking sector.”

To help borrowers facing higher repayments because of the franc’s gains, the government plans to convert $3.4 billion of Swiss loans into euros under a law approved by parliament on Sept. 18. The mostly foreign-owned lenders will shoulder losses estimated by the Croatian central bank at $1.2 billion. The largest providers have said they will dispute the legislation in courts while the European Central Bank has said it threatens Croatia’s foreign reserves and investor confidence.

That’s not the view of Lutz Roehmeyer, a money manager overseeing $1.1 billion of emerging-market debt at Landesbank Berlin Investment GmbH. He increased holdings of the nation’s Eurobonds during last month’s selloff.

“I’m very bullish on Croatia,” Roehmeyer said last week. “The yields are too high, even with the weak economic growth and the unorthodox loan-conversion law that sours relationships with western banks.”

The EU will keep pushing Croatia toward fiscal responsibility, he said.

Still, the government that emerges from the Nov. 8 election may have a tough job cutting the budget deficit from the 5 percent of gross domestic product forecast for this year without undercutting the economic recovery. Croatia’s gross domestic product will expand 0.5 percent this year, according to the median projection of 11 economists. Public debt will climb to 93.9 percent of GDP in 2016 from 90.5 percent this year, topping Hungary’s 73.5 percent and the EU average of 86.9 percent, according to European Commission projections.

“The period of drift could well last at least through to elections,” said Nomura’s Ash. “Croatia will likely ride through all these threats, without causing a major dislocation in the underlying credit story.”

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