ZAGREB, Sept 15 (Reuters) - The Croatian government is facing its first lawsuit for forcing local banks to convert Swiss franc loans into euros, Foreign Minister Miro Kovac said on Thursday.
Failure to strike a deal with the country’s lenders could undermine Croatia’s efforts to reduce its public debt and budget deficits.
Local media said Italy’s UniCredit had filed a suit before the Washington-based international investment court opposing the forced conversion. UniCredit, owner of Croatia’s biggest lender Zagrebacka Banka, was not immediately available for comment.
“The first lawsuit has arrived. We will try to find a solution that will not burden our budget and will protect the citizens who took such loans,” Kovac said.
The previous Social Democrat-led government pushed through a law before an election late last year ordering banks to convert loans denominated in Swiss francs into euros at their own expense, imposing about 1 billion euros ($1.1 billion) of losses on them.
Kovac said the Social Democrats, who lost the late 2015 election, had not thoroughly thought through the conversion and had implemented it in a populist manner.
The European Commission asked the new government in July to rethink the law, saying it disproportionately hurt local lenders and was applied retroactively in a way that undermined investor confidence.
Banks in Croatia and many other eastern European countries extended Swiss-franc loans during the credit boom in the 2000s, primarily for mortgages or commercial property purchases, to take advantage of low Swiss interest rates.
When the Swiss central bank lifted its cap on the value of the franc early in 2015 and the franc surged, the loans became far more expensive to repay for local borrowers.
Hungary’s government forced local lenders to convert the loans in late 2014, and Poland is still trying to resolve its own foreign-currency mortgage problems.
More than 90 percent of Croatia’s local banks are owned by parent companies in the European Union. Some have asked the Croatian Constitutional Court to assess whether the forced loan conversion is in line with the constitution and indicated that they may seek international arbitration.
Croatia had a snap election last weekend after the collapse of the previous short-lived coalition. The conservative HDZ party won the most seats and began talks with potential partners in a future coalition government this week.
Once a new government is formed it must reply to the objections of the European Commission. Officials in the caretaker government have indicated that talks could be held with lenders to try to resolve the forced-conversion issue, although it will now be up to the new administration to take action on the issue. (Reporting by Igor Ilic; Editing by Hugh Lawson)
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