Romania Parliament Approves Law to Convert Swiss-Franc Loans

  • Legislation allows conversion into lei at historical rates
  • Banks may incur losses of $586 million, central bank says

Romanian lawmakers approved a bill allowing the conversion of Swiss-franc loans into the local currency at below-market rates, a move that could cost banks almost $600 million and which the central bank said risked undermining economic gains.

With less than two months to December general elections, lawmakers voted unanimously in favor of the law, which lets borrowers switch loans into lei using the exchange rates under which they were issued, Speaker Florin Iordache said Tuesday in Bucharest. President Klaus Iohannis, who must sign the legislation for it to come into force, said he’ll ask for input from “all parties involved, including banks,” before making a decision.

“This law was designed to benefit all Swiss-franc borrowers, to avoid any kind of discrimination,” Iordache said after lawmakers eliminated previously proposed conversion limits, such as a maximum loan value of 250,000 Swiss francs ($253,000).

The European Union’s second-poorest country is joining nearby Poland and Hungary in helping foreign-currency borrowers who were wrong-footed by the surge in the franc and must now make bigger monthly repayments. After months of wrangling, lawmakers softened an initial proposal so that it only applies to loans denominated in the Swiss currency. Local lenders oppose the bill, whose debate in parliament sent the leu to a three-month low. Losses could reach 2.4 billion lei ($586 million), according to the central bank.

The currency pared some of the losses on Tuesday, gaining 0.1 percent to 4.5112 per euro at 3:17 p.m. in Bucharest.

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Only about 5 percent of Romanian household debt is denominated in Swiss francs, less than in other eastern European nations. Even so, the central bank has warned that six lenders risk difficulties with their solvency ratios if the bill takes force. Central Bank Governor Mugur Isarescu warned on Tuesday that passing laws that intervene in commercial contracts might impact Romania’s macroeconomic stability and have a negative effect on the country’s risk indicators and credit rating.

“Romania has the best macroeconomic position that I’ve seen in 26 years, but the risks have never been higher either,” Isarescu said. “When you have measures that have a negative impact on contract discipline, it raises a question mark about the sustainability of the macroeconomic balances that have been achieved after considerable effort.”

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The bill’s approval comes in the buildup to Romania’s Dec. 11 parliamentary ballot, which will end the rule of the current technocratic government. Lawmakers have yet to debate draft laws to expand tax cuts, raise state wages and boost pensions after two earlier rounds of fiscal easing.

“Swiss-franc lending was never a significant issue in Romania,” said Nicolaie Alexandru-Chidesciuc, a London-based economist at JPMorgan Chase & Co. “Yet, approaching parliamentary elections have transformed it into a tool to get votes, and worryingly for the banks the proposal has support from across the Romanian political spectrum.”

After a clash between the two major political parties last week over planned eligibility criteria delayed a final vote, lawmakers scrapped the loan ceiling and a proposal that conversion would only be open to borrowers whose debt-to-income ratios exceed 50 percent.

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