Loans denominated in foreign currency

Before the financial crisis, approximately 60,000 Croatian households had taken out loans in foreign currencies, mostly in Swiss francs and in euros. These ‘foreign currency’loans were sold to consumers at lower interest rates than loans in the local currency. However, the risk of currency fluctuations was not clearly explained to borrowers, and the banks appear to have failed in their responsible lending obligations.

Due to a substantial surge of the Swiss franc against the euro after the financial crisis, monthly repayments in Swiss Francs increased and, in certain cases, even doubled. Loans denominated in Swiss francs increased in value by 4bn kuna to around 27bn kuna (€3.5bn) in 2015.

To allow distressed borrowers to convert their loans into kuna, the government decided to fix the exchange rate at 6.39 kuna for 1 Swiss franc for one year, the level at which the currency had been before the surge of the Swiss franc. Banks in Croatia, mostly foreign-owned, protested against the decision. Italy’s UniCredit, owner of Croatia’s biggest lender Zagrebacka Banka,filed a suit before the Washington-based international investment court opposing the forced conversion.