Banks Prepare to Sue Croatia Over Swiss Franc Loans Law

  • Five foreign banks sent `pre-notices of dispute' to government
  • Parliament to vote on law after central bank warned of risks

Five foreign banks are preparing to sue Croatia at the International Center for Settlement of Investment Disputes in Washington should the government continue with its plan to convert loans denominated in Swiss francs into euros over the banks’ protests.

The banks are sending “pre-notices of dispute” to the government in Zagreb while urging it “once again for a just and equitable solution,” Ingrid Krenn-Ditz, spokeswoman for Raiffeisen Bank International AG, said by e-mail in Vienna on behalf of the group of banks that also includes Erste Group Bank AG, UniCredit SpA, OAO Sberbank and Hypo Group Alpe Adria AG.

“Reactions from the government so far did not show any sign of willingness” to negotiate the issue with the banks, Krenn-Ditz said. “The banks will thus start to prepare for legal actions,” she said.

The government of Prime Minister Zoran Milanovic, which faces a general election later this year, proposed on Sept. 10 to allow the conversion of $3.4 billion of Swiss-franc loans into euros to help citizens cope with payments. The conversion costs will be borne by banks, according to the government proposal. The costs are estimated by the government at as much as 6 billion kuna ($899 million), while the central bank said the costs may reach 8 billion kuna.

Compromise Solution

The banks said the proposal would violate European Union laws and bilateral investment treaties, and appealed to the government to reopen talks and find a compromise solution that would help the most vulnerable borrowers.

Finance Minister Boris Lalovac on Sept. 11 rejected the banks’ offer to reopen talks and said the government may increase penalties should the banks not comply with the new law. Parliament is expected to approve the law this week. Government spokesman Nikola Jelic wasn’t immediately available on Monday to comment on the banks’ actions.

Like other eastern European countries including Hungary and Poland, mortgages and consumer loans in francs 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 are now forking out more kuna to cover payments, and many are struggling to keep up.

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 have been 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 6.88 kuna per franc, while still higher than rates when most loans were taken.

The central bank on Sept. 12 said the conversion play may weaken the Croatian currency, the kuna, and hurt the country’s financial stability. Later in the day it said it has “determination and instruments” to keep the kuna stable against the euro.

The kuna remained stable at 7.54 against the euro at 3:21 p.m. in Zagreb, according to data compiled by Bloomberg.

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