Croatia's woes have no end. The economy of the country has been in constant decline for six years in a row without a perspective the trend to change soon because the government gave in to politics than to doing deep structural reforms. Unemployment has been growing, the public debt too, also growing is the number of new parties on the political stage. And right when the government thought they can get a sip of air after a tensed and ultimately lost campaign for the presidential elections, won by the opposition, Switzerland decided to unleash the exchange rate of the Swiss franc which started to rise with threatening pace and last week it outpaced the rate of the euro to the Croatian kuna. Without much thought and solid public debate the government decided, during a telephone meeting last Tuesday, to freeze the exchange rate at 6.39 kunas for one year. The draft law on amending the law on crediting was sent to the Sabor (the parliament) via the fast procedure and was subjected to a heated debate on Thursday (January 22).
The Sabor amended the law by 85 votes "for", one "against" and one "abstained" out of 151 members of parliament. The MPs from the Croatian Democratic Union (HDZ) did not take part in the voting because Speaker Josip Leko rejected their demand before the vote to be discussed their proposal the government and the Croatian National Bank to be obliged to find a durable solution with the commercial banks in 90 days not only about the loans in francs but also in other currencies, including euro.
The problem with the credits in Swiss francs has turnded (again) into a central issue in Croatia's public domain because their share of all the other credits is significant - around 30%. Those are predominantly home loans with the so called "currency clause" which means a clause that warns that the price of the credit is dependent on the exchange rate. Up to the time when was the housing boom in the beginning of the 2000s, the exchange rate of the franc to the Croatian kuna was very low - around 5 kunas per franc. On 21 January, the exchange rate exceeded the value of the euro in Croatia - 7.70 kunas per franc whilst the price of the euro was 7.69 kunas.
Another very important factor is that in Croatia the level of non-performing loans (NPLs) is traditionally high as is in the whole region - 16.4% according to the 2014 IMF report on the country's situation - though it is not among the highest for Central and Eastern Europe. The share of the non-performing loans in Swiss francs is especially high which, according to the IMF, reflects the appreciation of the franc. By September 2013 their share was 11.3% of all the NPLs. To compare, the NPLs in euro are 4.5%.
The problem with the loans in francs is not being raised at government level for the first time. In 2013, the Ministry of Finance introduced amendments to the law on crediting obliging the banks to fixate the interest rate on loans in francs and in some cases to even return money. The Croatian media back then unanimously welcomed this as a victory for the "Franc" association (an association of the owners of loans in Swiss francs) and of the citizens in general against the banks. The titles of the most circulating newspapers and media then were completely unanimous: "A historic sentence - the citizens have defeated the banks" in Vecernji list, "Citizens have defeated the banks" in Dalmacija news, "Citizens got a weapon against the banks" in 24 sata, "First instance sentence for Franc - the citizens have defeated the banks" in Poslovni dnevnik.
The motives of the court were that there is a need of a radical change of the practise the entire risk of the loan, no matter in what currency, to be borne by the consumers only. "To bind the consumer today with a loan for 30 years with a floating exchange rate is equal to an eternity because the pace of changes in the world and at home is such that we cannot foresee what will be in 30 years time", said the judge who turned into a hero in Croatia. The sentence is still not final but, according to experts, the appealing could take years. The sentence affects eight banks: Zagrebacka banka, Privredna banka, Erste & Steiermärkische Bank, Raiffeisenbank, Hypo alpe-adria-bank, OTP, Société générale, Splitska banka and Volksbank.
A political issue
And although the problem with loans in francs is indeed serious because of their big number and the possibility for an additional rise of the NPLs, it also has a political aspect. On 11 January, took place the second round of the presidential election won by HDZ candidate Kolinda Grabar-Kitarovic. She has already met with the Franc association and has called on all interested parties to undertake measures as soon as possible. The association demanded from her to insist in front of all parties to adopt amendments to the law on crediting to introduce a ceiling of the interest rates on home loans in francs, to invite a member of the association as an unpaid adviser in her economic council, to be a patron of an international conference in March this year on the "Illegal agreements on the interest rates and the currency clauses in francs". The association demanded the same thing from the outgoing president Ivo Josipovic.
HDZ is intensely preparing for the parliamentary elections in the end of the year and even insists on early elections. It seems that the party has huge chances for a victory. The actions of the government undoubtedly are part of the fight for the hearts of the Croatian voters, exhausted by the six-year long recession, the huge unemployment which among the young people is the third highest after Spain and Greece. The government's economic policy was a central topic during the campaign for the presidential election considered a test for the general elections in the autumn. The first round of the election brought the greatest surprise - a significant support received the newest player on the Croatian political stage - the 25-year old Ivan Vilibor Sincic. He is an activist with the non-governmental organisation Live Wall which fights against foreclosures.
After the elections, he was arrested several times during late night campaigns on preventing the police to forcefully move people from their lost apartments. Sincic has already announced his intentions to run in the parliamentary elections in the autumn. In the current environment, the chances he and his new party to turn into an unsurmountable political factor are not to be ignored. Against the backdrop of all this, quite sobering was the reaction of the governor of HNB Boris Vujcic who said that 4% of the Croatian households have home loans in Swiss francs. The keeping of the exchange rate down at its current level could bring losses to the banking system worth half a billion kunas, he warned.
The banks sent a letter on Wednesday to the government expressing fears that this move would destabilise the banking system and could deteriorate the already junk credit rating of the country. They also threatened that this would lead to freezing of lending which is already quite low. At the moment, the discussed options are a gradual conversion of the loans in kunas (the Hungarian scenario) but, according to Mr Vujcic, this would cost 3 billion euros of the HNB currency reserves. There were also demands to remove the currency clause which, in the words of the Croatian central banker, would lead the country to a chaos and collapse of the financial system. In its report last year, the IMF pointed out that banks in Croatia are sufficiently capitalised. Even with the worst scenario, which is all NPLs to be written off, the losses can be absorbed by the capital buffers.
At the regular meeting of the government last Thursday, Prime Minister Zoran Milanovic promised that the banks will not be in danger. "I guarantee that", he said. According to him, with the amended law only a part of the problem is resolved. "Croatia is one out of 2-3 countries in the world where there is this syndrome the people to have loans with their interest rates rising whereas the value of their homes is falling. There is no such thing anywhere in the world. We will see what to do with the loans in euros", the premier added. Many experts have warned, however, that with this decision the government is opening the Pandora's box. And as it was taken hastily, without serious discussions, it is not clear how it will affect the financial system, the credit rating and also Croatia's public finances. It is clear, though, that it was dictated by rather political than economic motives.