CHF-denominated mortgages in Western Balkans

(Martin Abegglen, CC BY-SA)

In mid-September, the Supreme Court of Croatia ruled that "the banks violated the collective interests and rights of the loan holders of CHF-denominated loans." Banks had violated clients' rights "by using unfair and harmful contract provisions."

Furthermore, the banks are said to have entered a currency clause that “ties” the loan principal to the CHF “without negotiating that matter separately.” The Court thus upheld the first-instance decision of 2013 declaring the currency clause “unfair and void.”

Following the Supreme Court decision, debtors have the right to sue banks in individual court proceedings by 2023, as well as to ask for refund of money overpaid. Eight defendant banks filed a complaint against the final decision by High Commercial Court in Zagreb finding “that the provisions on CHF-denominated loans and unilateral changes in interest rate are unfair and void.” However, all of them were dismissed.

The entire judicial outcome in Croatia is just a new chapter in a long saga of creditors and debtors of the CHF-denominated mortgages, which has become a major social problem in the banking and financial sphere, primarily in Croatia, but in Serbia, as well.

What has led to this issue?

It had all started before the 2008 financial crisis with favorable borrowing terms in the Western Balkans. The borrowers took mortgages denominated in the CHF, mainly for the purpose of real estate purchase. Banks granted these loans under somewhat more favorable conditions than EUR-denominate mortgages. There were only few long-term loan placements (mostly mortgages) in domicile currencies — the RSD and HRK. This was a consequence of a dual currency system present in these countries. Most people have deposit savings in foreign currency, bank deposits are mainly in the EUR, and banks use placements in more stable foreign currencies as a protection against the risk of potential major fluctuations in the value of domestic currencies.

Most loans indexed in the CHF were granted in Croatia — about 125,000, less in Serbia (20,000), Bosnia and Herzegovina (11,400), and Montenegro (700). As a result, this issue had the strongest consequences in Croatia, both financial and social, so the Croatian authorities paid quite a bit of attention to it. Nonetheless, the very basis of the issue was similar in all Western Balkan countries.

The monetary authorities in Serbia warned about this risk. Dejan Soskic, a professor at the Faculty of Economics in Belgrade and the former governor of the National Bank of Serbia (NBS), pointed out the risks of borrowing in a currency other than the one in which the borrower generates income. However, this warning did not make much sense considering that banks in Serbia indexed almost all mortgages in foreign currencies (which is still a common practice). Radovan Jelasic, who was in the capacity of NBS governor in 2007, warned that borrowing in the CHF was particularly risky.

Since the global economic crisis affected the currency markets, there was a sharp increase in the value of the CHF compared to other currencies, including the HRK and RSD. Thus, in 2007, CHF1 was worth about RSD50, while in 2017, CHF/RSD exchange rate was about 1:105. Thus, the CHF-denominated mortgages increased so much that debtors ended up owing much more money in domestic currency value than they did when their mortgages were first granted, even after several years of repayment.

Problem solving in Serbia

As a consequence of the relatively small number the CHF-denominated loans compared to the total placements, searching for a solution in Serbia was somewhat slower than in neighboring countries. Thus, in 2016, the President of The Consumer Protection Association “Effektiva” warned about the fact that Serbia was lagging behind its neighbors in solving this problem and that thousands of debtors’ families were under existential threat. Debtor associations have been established in all countries where this problem had arisen, while in Belgrade, protests lasted for months.

Earlier, in January 2015, the National Bank of Serbia brought forward four possible proposals that would make loan installment repayment much easier. “The amount of these loans has been reduced,” said NBS Governor Jorgovanka Tabakovic when asked about these measures. Debtors, on the other hand, thought the opposite.

It was only in April this year that the situation in Serbia was politically resolved — the National Assembly adopted lex specialis “Law on Conversion of Housing Loans indexed in the CHF”.

According to the law, the remaining debt on the loan shall be converted into the EUR and 38 per cent of this amount shall be written off. The interest rate that would be charged for this re-indexed loan shall be the same as the one valid on March 31st, 2019 for the EUR-denominated loans of the same value and due date. The upper interest rate shall be limited at 4 per cent for fixed interest rates, or 3.4 per cent plus a three-month or six-month Euribor for variable interest rates. Predrag Batas, a member of CHF Serbia association, said that these measures were very unfavorable and that they only prolonged the agony of the debtors.

This legal solution allows 15,785 debtors to have their loans re-indexed. The law came into force on May, 2019, and debtors were given thirty days to decide whether they would convert their loan under the offered terms. According to the provisions of the law, the portion written-off the loan was not considered as an income and, thus, was not taxable.

According to a statement by the National Bank of Serbia, about 15,600 loans, worth RSD59.2bn in total, were converted based on this law, which is about 90 percent of housing loans indexed in Swiss francs.

Banking risk

The former governor of the National Bank of Serbia, Dejan Soskic said, before the new law was implemented, that the CHF-denominated loans had become a threat to the financial system. “It is a threat to the financial system, which could have been foreseen; we’re facing something that has occurred in other countries before. That is why we should not have let it happen,” Mr. Soskic told BBC.

According to him, the NBS is the one to blame “for not preventing such loan expansion because it could have done so.” Mr. Soskic added that the NBS had stopped indexing loans in the CHF during his term as a governor in 2011. “Law on Protection of Users of Financial Services” was adopted the same year. According to its provisions, banks shall warn the clients about potential currency risks.

Conversion in Croatia

With the enforcement of the Law on Conversion in Croatia, the loan principal is reduced by 30 per cent and converted into the EUR. According to Goran Aleksic, a legal representative of the Franak Association, this law covered 55,000 loans that had not been paid by 2016.

The enactment of the law was prompted by a combination of economic and political circumstances — there was a sharp jump in the CHF to the HRK exchange rate; 20,000 people gathered in protests in Zagreb on a single occasion, and it was the election year.

Decision opening a new chapter

Regardless of the laws in Croatia and Serbia, the re-indexing and loan conversion, the decision made by the Supreme Court in Croatia is still a major turnaround. The Court also found that there was a legal interest of the consumer in establishing the unfair and void provisions of the loan agreement, regardless of the carried-out conversion. Moreover, the banks are said to have been aware that the change in the CHF to HRK exchange rate was almost certain. Even so, they encouraged clients to conclude contracts, thereby doing them harm.

According to Franak association, all beneficiaries of the CHF-denominated mortgages have been given the opportunity to claim their rights in court. “They can sue banks and claim the money that they have paid to banks on a lack of clear grounds. So far, there have been 30,000 lawsuits, and in our association, we expect that this number will rise to more than 100,000 by 2023,” the association members stated shortly after the decision was rendered.

It has been estimated that banks had to repay clients about the EUE2bn in Croatia. Debtors in Croatia can file individual lawsuits by 2023, when the statute of limitations shall expire.

Belgrade lawyer Vojin Biljic said that the key point was the judgement of the European Court of Justice, which took the view that the nullity of the currency clause resulted in the restitution of loans in full amount and the consequent repayment of overpaid amount of loans complete with interest rates.

According to the Law on Conversion, loan conversion does not eliminate this possibility. Namely, during the negotiations on the draft law, the banks suggested that the conversion contract shall have the power of out-of-court settlement. “This would mean that, by signing the contract, all disputed relations between the bank and the client in this case shall be resolved,” explained lawyer Jelena Pavlovic, a member of CHF Serbia association. The European Court of Justice, however, determined that the consequences of nullity cannot be strengthened by law.

Milica Milojević is an economist and analyst, a part-time economic journalist with corporate, banking, and consulting experience. She has written papers on monetary and political economics, and economic history of Serbia and the Balkans.

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