Croatia to Continue With CHF Loan Plan Over Banks’ Protests

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Croatia will continue with plans to allow the conversion of $3.4 billion of Swiss-franc loans into euros after foreign banks said the proposal would violate European Union laws and bilateral investment treaties.

The strategy, which is expected to be detailed next week, would cost banks as much as about 6 billion kuna ($892 million), while some losses would be tax-deductible, said Deputy Premier Branko Grcic He was responding to a joint statement Thursday by Erste Group Bank AG, UniCredit SpA, OAO Sberbank, Raiffeisen Bank International AG and Hypo Group Alpe Adria AG that criticized the plan.

“It is not smart to sue the government in the country where one does business,” Finance Minister Boris Lalovac told reporters in Zagreb. “I hope they want to continue to do business in Croatia, and that for the first time ever they will listen to peoples’ voices.”

Like other eastern European countries including Hungary and Poland, mortgages and consumer loans in franc were popular in Croatia because they offered lower rates than those in kuna, the national currency. Their political significance rose after Switzerland did away with its cap on the franc in January, allowing the currency to surge. Croats now are forking out more kuna to cover payments, and many are struggling to keep up.

Financial institutions are “seriously concerned about these developments and the statements given by the Croatian Government,” the banks said in the statement. “A forced conversion without considering the income situation or the debt service capability of the customer is a severe retroactive interference with existing contracts.”

Outstanding Totals

There are about 55,000 franc-denominated loans outstanding in Croatia, totaling 23.1 billion kuna in face value, according to the Croatian national bank. About 38 percent of all mortgages are franc-denominated. Even more are taken out in euros, but they are of less concern because the kuna is pegged to the common currency.

The government in January enacted a special law freezing for a year the exchange rate for these loans at 6.39 kuna per franc. The rate is below the current market rate of 6.93 kuna per franc, while still higher than rates when most loans were taken.

Lalovac said on state radio last week that banks will have three months to prepare after the law is enacted. He said loans would be converted to euros based on the rate at the time of conversion.

The government in Zagreb will probably submit the proposal at the cabinet session on Sept. 10, spokesman Nikola Jelic said.

Breach of Law

“Such a step would not only be a breach of European law but also of the bilateral investment treaties between Croatia and the respective home countries of the banks involved,” the banks said in the statement.

In Poland, international bank owners including General Electric Co. and Raiffeisen, protested a draft bill that would force them to share the cost of converting franc mortgages into zloty last week, also threatening to claim damages from the government under investment-protection treaties.

UniCredit’s Zagrebacka Banka is Croatia’s biggest bank with about a quarter of the country’s total assets, according to Raiffeisen Research. Erste is the third-biggest and Raiffeisen is No. 4. Together, the five represent more than half of the Croatian banking system.

The five protesting banks are all Austrian, as UniCredit and Sberbank manage their eastern European assets through Vienna-based subsidiaries. Hypo Alpe was recently acquired by Advent International Corp, but it still owes about 2 billion euros ($2.23 billion) to its state-owned “bad bank,” Heta Asset Resolution AG.

Head First

“I would rather throw myself head first from the second floor than for the government to give up the plan,” Small Business Minister Gordan Maras told reporters in Zagreb Thursday. “During all the crisis years, all the banks in Croatia have had their profits mostly untouched and have earned billions from citizens. It’s time someone protect the citizens’ interest.”