Croatia Bolsters Bank Funds, Aids Kuna Before Franc-Loans Switch

  • Central bank adds liquidity to market via repo tender
  • Foreign-exchange intervention aimed at supporting kuna

The Croatian central bank boosted lenders’ liquidity and intervened to support its currency as the country prepared for a conversion of Swiss-franc loans that’s fueling a row between the financial industry and the government.

The monetary authority in Zagreb held the first refinancing repurchase tender in 6 years on Wednesday, accepting all of 1.2 billion kuna ($176 million) in bids at a fixed rate of 0.8 percent. The central bank also intervened in the foreign-exchange market by selling 268 million euro.

The central bank is seeking to smoothen the conversion of loans from Swiss franc to euro under a law that became effective on Wednesday. Mortgages and consumer loans in francs, which had been popular because of lower interest rates, became a political issue in some central and eastern European nations after Switzerland removed the limit on franc gains in January and allowed the currency to surge.

“The central bank is acting pragmatically; first ensuring through the repo tender that the banks receive kuna as they prepare for the conversion,” Alen Kovac, chief analyst at Erste Group Bank AG’s unit in Croatia, said by phone. “Then, with the foreign-exchange intervention, it defended the kuna rate and allowed banks to buy euros they need for the conversion.”

In addition to the repo tender and the currency intervention, the Croatian National Bank also plans to scrap a rule requiring lenders to hold its bills. It estimates that the move may free about 3.4 billion kuna of banks’ funds.

Croats are now forking out more kuna to cover payments on franc loans, and many are struggling to keep up, which forced the government to address the matter with legislative changes before it faces general elections later this year.

The package of laws approved this month allows the switch of $3.4 billion of franc loans into the single currency to help citizens cope with rising payments. The government expects the banks to bear the conversion costs it estimates at as much as 6 billion kuna, while the central bank says the burden may reach 8 billion kuna.

Units of Raiffeisen Bank International AG and Intesa Sanpaolo SpA said on Wednesday they planned to challenge the legislation at the Constitutional court.

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