January 23, 2015 / 12:50 PM / 5 years ago

UPDATE 1-Croatia's parliament endorses 1-year Swiss franc rate fix

* Some 60,000 Croatians hold loan indexed in Swiss francs

* Banks oppose rate fix to address surge in franc’s value

* Government faces election later in 2015 (Adds background)

By Igor Ilic

ZAGREB, Jan 23 (Reuters) - Croatian lawmakers on Friday backed a government plan to help borrowers who have been hurt by the Swiss franc’s surge in value by fixing the exchange rate at 6.39 kuna for the next 12 months

The fixed kuna rate, in line with the rate before the Swiss National Bank abandoned its cap on the currency a week ago, is designed to provide respite for some 60,000 Croatians who hold loans denominated in Swiss francs.

Franc loans became popular across central and eastern Europe in the 2000s because of their low interest rates.

Croatia’s stock of Swiss franc-denominated loans stands at some 27 billion kuna ($3.9 billion), or a little under eight percent of gross domestic product (GDP).

The government, which faces an election later this year, says it is still searching for a lasting solution to the problem in talks with the central bank and commercial banks, which risk another spike in defaults.

Prime Minister Zoran Milanovic, whose Social Democrats are trailing in opinion polls after six years of recession in the European Union’s newest member state, has said he will consider converting the loans into kuna, following the example of Hungary late last year.

The central bank, however, has warned this would deplete Croatia’s currency reserves by 30 percent and threaten the kuna’s exchange rate stability against the euro, the anchor of monetary policy in Croatia.

Officials have floated the idea of turning the debtors into protected tenants, while forbidding housing loans in currencies other than the kuna and euro.

Banks have come out against fixing the exchange rate, saying they had only been prepared to do so for three months pending a long-term solution. They, and some opposition deputies in parliament, have questioned the legality of the move.

$1 = 6.8869 kuna Writing by Igor Ilic; Editing by Matt Robinson/Ruth Pitchford

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