Serbia Won’t Follow Hungary, Croatia to Ease Franc Loan Burden

Serbia won’t fix the dinar against the Swiss franc or impose industrywide solutions for borrowers as it tries to prevent a surge in bad loans and avoid undermining public finances after the franc’s surge.

The National Bank of Serbia and commercial banks see adjusting interest rates on franc-indexed mortgages as the solution that provides them with the most leeway. They’re also exploring the possibility of restructuring some loans and offering conversions of Swiss franc debt into euros, central bank Governor Jorgovanka Tabakovic told reporters today.

“Solutions should not be rushed,” Tabakovic said in Belgrade after the meeting with banking officials. “Regulators in other markets have not come up with optimal solutions either.”

After committing to a fiscal consolidation plan under a three-year loan program with the International Monetary Fund, Premier Aleksandar Vucic’s government has no space to assist borrowers hit by the franc’s surge following Switzerland’s decision to end its currency cap Jan. 15, Tabakovic said. The move prompted governments across eastern Europe to seek new ways to help borrowers whose monthly payments jumped along with the Swiss currency.

Franc Mortgages

Serbia’s dinar has lost 17.6 percent against the franc since the start of the year, making it the world’s third worst-performing currency after the Belarusian Ruble and the Moldovan leu, according to data compiled by Bloomberg. Serbia has around 22,000 Swiss-franc linked mortgages worth more than 1 billion euros that account for 29 percent of all housing loans, Tabakovic said.

Tabakovic and her team met with commercial banks after their decision last Friday to take an individual approach to borrowers, as any blanket solution must be accessible to anyone with liabilities in foreign currencies, she said.

Serbia will eschew steps like those taken by neighbor Croatia, where parliamentary elections are due this year. Policy makers there capped the exchange rate of the Swiss franc at 6.39 kuna, triggering complaints from lenders who said they may seek damages for a move they deemed unconstitutional.

Another former Yugoslav state, Slovenia, plans no aid to some 10,000 people with 794 million euros ($894 million) in outstanding Swiss-franc-denominated loans. Its central bank sees “no significant” impact on the banking industry’s stability, central bank spokeswoman Bojana Leskovar said by phone.

Interest Rates

A possible solution for Serbia would require banks to adjust interest on loans to market levels, considering that banks have been charging interest rates ranging from 1.27 percent to 6.12 percent, Tabakovic said. Last month, Vucic’s government cut public wages by 10 percent, weakening the creditworthiness of many borrowers.

“Interest rate adjustments could absorb up to a quarter of the Swiss franc increase,” Tabakovic said. “There’s a need of fair burden sharing.” The Serbian central bank and commercial banks will meet again on Feb. 2.

The central bank “has no intention” of copying measures imposed by Hungarian Prime Minister Viktor Orban who ordered lenders last year to convert $14 billion of foreign-currency loans into forint, Tabakovic said.

It won’t fix the Swiss franc exchange rate either, as “the loss for banks would be immeasurable,” she said. She added that she wants to avoid measures that would trigger an increase in non-performing loans, which already stand at around 23 percent of banks’ assets.

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