Recently, European finance ministers expressed unfavorable opinions regarding the conversion of loans from Swiss francs to euros. The official stance of the European Commission is expected by the end of the month. There should be no illusions that it will be different.
Several Croatian banks and private individuals have requested a review of the constitutionality of amendments to the Consumer Credit Act. It is unrealistic to expect that the Constitutional Court will make a decision before the elections. The guardians of constitutional values are not in a hurry to heat up the pre-election atmosphere.
The further fate of the mentioned Act can go in two directions. If the Constitutional Court annuls the adopted amendments to the Act, loans in francs will remain in unchanged status. In that case, state institutions warn that they have a ‘Plan B’, mentioning a tax on banking activities. For now, the opposition political option does not express what its reaction would be to such a scenario. It is too dangerous, before the elections, to explicitly express oneself on such a hot topic, as they do not know what they will do if power falls into their lap.
Neither are the banks innocent
If the Constitutional Court does not accept the objections to the amendments to the Act, which seems unlikely to me, numerous consequences will arise. Banks will likely continue the legal battle in international instances. Since such legal procedures are lengthy, banks will have to start applying the Act. First and foremost, they face a demanding technical task: recalculating all loan batches from francs to euros, concluding new contracts with loan users, many ambiguities in the implementation of the law, and numerous legal disputes on various grounds.
However, this is the less important part of the problem. More importantly, banks will have to ensure additional kuna liquidity, likely raise active interest rates, ensure balance in foreign exposure, and change their business policies. Considering the high capitalization (around 22.3 percent), the conversion will not seriously jeopardize the capital strength of the banking sector, which will decrease to around 19.7 percent, still above the regulatory requirement.
In the emergence of problems with loans in Swiss francs, banks are not ‘innocent’ and would bear other consequences as well. Primarily, their profitability, which has already decreased in recent years, would be seriously jeopardized. It is estimated that it will take at least three years for banks to compensate for losses based on the conversion. The most important consequence for banks is of a reputational nature, which will make foreign borrowing more difficult for them. There will also be a shift in the lending policy in the domestic market; banks will increasingly orient themselves towards private clients, certainly with higher costs.
