EU asks Croatia to rethink franc loan conversion - state agency

ZAGREB, July 8 (Reuters) - The European Commission has asked Croatia to rethink a law ordering banks to convert Swiss-franc loans into euros, saying on Friday it disproportionately hurts local lenders, state media reported.

The law, brought in last year, was also applied retroactively, a move that could undermine investors’ confidence in the economy, state news agency Hina quoted Brussels officials as saying.

The legislation ordered the conversion of loans denominated in Swiss francs entirely at the banks’ expense - a move that analysts say imposed about 1 billion euros ($1.11 billion) of losses on local banks, almost all of them owned by parent companies from the European Union.

Most of Croatia’s Swiss franc loans were made during the credit boom in the 2000s, driven by low interest rates, and were primarily used for mortgages or buying commercial property. When the Swiss central bank lifted its cap on the value of the franc last year and the franc surged, they became far more expensive to service.

“The costs of conversion have almost entirely burdened the lenders and the measure goes beyond what is necessary and proportionate to achieve a legitimate goal of protecting poorer borrowers and avoid a consumer credit crisis,” Hina quoted the Commission’s spokeswoman Vanessa Mock as saying in Brussels.

“We hope that Croatia will find a proportionate solution. It is important in the interest of all, consumers and investors,” Mock added.

The measure was implemented by the Social Democrats-led government shortly before a national election held in November.

The current Croatian caretaker government was not available for an immediate comment. Brussels expects an answer on the warning by mid-August.

Croatia faces a snap election, most likely in early September.

Some banks have already filed a suit with the Constitutional Court and indicated they could seek international arbitration.

The European Commission can also take action through the European Court of Justice if it is unhappy about how a member state responds over such an issue, covered by EU law. ($1 = 0.9025 euros) (Reporting by Igor Ilic; Editing by Andrew Heavens)