ZAGREB Croatia's Constitutional Court on Friday rejected a request from local banks to consider whether a law on the conversion of Swiss franc loans into euros, aimed at protecting borrowers and implemented in late 2015, was against the constitution.
"Such a measure was necessary at the time to achieve a legitimate goal of protecting the borrowers from the firming of the Swiss franc," head of the court Miroslav Separovic said.
Households and firms across Croatia and eastern Europe who had taken out Swiss franc mortgages to benefit from low interest rates were then caught out by the surge in the franc, particularly after Switzerland scrapped its cap on the currency in January 2015.
Eight local banks asked for a constitutional assessment of the conversion law, passed by the centre-left government at the time, saying it did not share fairly the costs and acted retroactively.
The law forced the banks to convert loans denominated in Swiss francs into those denominated in euros, entirely at the banks' expense, and thus protect borrowers from rising payments due to exchange rate movements. The central bank assessed that the cost of conversion had amounted to around one billion euros ($1.06 billion).
"A calculation of costs did not take into account positive effects of conversion which improved the banks' lending portfolio, while the banks also got a tax exemption on the basis of conversion," Separovic said.
The vast majority of loans and deposits in Croatia are denominated in euros. Croatia's central bank keeps the national kuna currency in a tightly managed float against the euro.
Local banks have indicated they could also seek a legal remedy abroad and a first such lawsuit had been submitted before the Washington-based international investment court.
($1 = 0.9400 euros)
(Reporting by Igor Ilic; Editing by Andrew Bolton)