As elections approach, populist parties shift the burden to foreign banks
Nothing is lost, everything is transformed. On Friday, 18 September, Croatia passed a set of laws to convert into euros the loans denominated in Swiss francs, held by 53,000 citizens. In the country, 38% of mortgages are denominated in this currency. They represent a total of 23.1 billion Croatian kunas in nominal value or 3 billion euros. These new provisions constitute a strong political choice: this amounts to charging the banks the cost of the soaring Swiss currency, which is currently trading around 1.10 Swiss francs per euro, 10% more expensive than the beginning of the year. The currency jumped in January when the Swiss National Bank (SNB) dropped its floor rate of 1.20 Swiss francs per euro.
The Croatian government, a center-left coalition, has pushed this law criticized by private and public financial actors, while in November must take place legislative elections, where right-wing conservatives are given favorites. Prime Minister Zoran Milanovic is killing two birds with one stone: he is helping indebted households and is keeping his promise to find a lasting solution to the difficulties caused by the soaring Swiss franc. ” Such legislation is being discussed especially in countries that are going through a period of political instability,” said Piotr Palenik, an analyst at ING’s Polish subsidiary of Bloomberg.
The after-sales service of the Croatian central bank
Banks, therefore, pay the bill: between 800 million and 1 billion euros (6 to 8 billion Croatian kunas). They have until mid-November to convert the loans and communicate to the borrowers their new monthly payments. The exchange rate for the payment of the loans is set at 6.39 kuna per Swiss franc since January against 6.99 kunas per Swiss franc for the current rate.
Embarrassed by this decision, the Croatian central bank will nevertheless have to provide after-sales service. On the one hand, she warned that the law would penalize the banking system, deepen foreign exchange reserves and weaken the Croatian currency. On the other hand, she tried to reassure investors that they had enough monetary instruments to limit the damage. But it is a snowball effect provided by the European Central Bank, worried about “the macroeconomic stability of the country.”
Foreign banks account for 90% of the Croatian market. Five of them (Erste Group Bank, UniCredit, Sberbank, Raiffeisen Bank International and Hypo Group Alpe Adria) want to sue the government. In a statement, they say that ” a forced conversion that does not take into account either the income or the ability to repay the customer is a serious retroactive interference on existing contracts .” Acerbe, the finance minister, Boris Lalovac, replied in front of an audience of journalists: ” It is not very smart to sue the government of the country where we do business. I hope that the banks want to continue to practice in Croatia, and that, for the first time in history, they will listen to the voice of the people. In the aftermath of the vote in Parliament, most banks in Croatia fell back on the stock market.