Abstract

In numerous Central and Eastern European (CEE) countries, the global financial crisis as well as the unpegging of the foreign exchange rate of the Swiss franc (CHF) against the euro amplified the repayment troubles of households with the outstanding CHF-linked debt. In Croatia, the CHF loans were approved mainly as mortgages to unprotected and subprime household borrowers without sufficient credit capacity for long-term euro-linked loans, which also contained a possibility of an incremental interest rate change, i.e., the so-called administrative interest rate. This article aims to disclose the reasons behind the credit boom of these loans, the unsustainable CHF debt hardship that the household sector consequently faced, and how it was/could have been resolved, with the Croatian banking sector at the center of the research. Although the CHF case of Croatia has some specificities concerning the prudential regulation and government-sponsored loan conversion, the findings about the supply and demand determinants of the CHF credit boom, as well as a critical assessment of the Croatian government and central bank interventions, might be useful for timely noticing universal threats from the exotic currency-linked loans for the systemic risk and financial stability, and for minimizing the negative externalities from probable debt relief measures. Based on the descriptive and univariate statistics conducted on Bloomberg and the Croatian National Bank (CNB) data, it was found that interest rate differentials and carry trading behavior were the main reasons for the rapid CHF credit growth in Croatia. Nevertheless, according to the financial experts’ opinions obtained via a questionnaire survey, and the court verdicts reached since, the financial consumer protection when contracting these loans was severely violated, which implies that the central bank must enhance its consumer protection role. By adopting a single-country and holistic approach, this is the first paper that deals with the socioeconomic dynamic of the CHF credit default issues in Croatia, which might be interesting as a case study or for making comparison with other CEE countries that have been coping with negative consequences of Swiss francization.

Highlights

  • The foreign currency (FX) clause (i.e., FX-linked loans) and administrative interest rate have been recognized as an economic, legal, social, and political problem in the Croatian banking sector since the onset of a considerable degree of non-performing loans indexed to the Swiss franc

  • Many articles about the loan dollarization/euroization issues served as a warning of what might happen to unprotected borrowers, the banking sector and the overall economy in case of foreign exchange rate (FX rate) appreciation e.g., (Beer et al 2010; Csajbók et al 2010; Yeşin 2013)

  • This paper reports on the Croatian experience with the CHF loans by combining personal finance, bank risk management and prudential regulation literature, with as much as possible data and facts, which the conclusions were derived from

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Summary

Introduction

The foreign currency (FX) clause (i.e., FX-linked loans) and administrative interest rate have been recognized as an economic, legal, social, and political problem in the Croatian banking sector since the onset of a considerable degree of non-performing loans indexed to the Swiss franc (hereinafter referred to as CHF loans). The paper adds to the general body of knowledge about the causes and consequences of the FX loans omnipresence among households in many banking sectors It emphasizes the foreign currency-induced credit risk as an important financial stability issue of numerous highly dollarized/euroized economies worldwide. The third section presents the empirical evidence for Croatia regarding the paper topic It discusses the supply- and demand-driven factors of FX-linked loans adoption in the Croatian banking sector, after which it discloses experts’ opinions on the issues connected with the CHF case, and summarizes the actions taken to solve the CHF debt crisis.

Croatian Banking Market—A Look at the Severity of CHF Loans Issues
January 2009–3 December 2020
11 February 2003–31 December 2008
Related Studies
Empirical Evidence for Croatia
Supply-Driven Factors of FX Loans Acceptance
Demand-Driven Factors of FX Loans Acceptance
Long-term
Financial Experts’ Opinions about FX Loans Terms
Debt Crisis Resolution
Lessons Learned
Findings
Conclusions

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