President of the European Central Bank Criticizes the Solution for Loans in Swiss Francs

The President of the European Central Bank weighs in on the Swiss Franc loan affair. 

As soon as the legal framework for the issue of loans in Swiss francs had been adopted by the Croatian parliament, the European Central Bank (ECB) has given its opinion. The ECB head Mario Draghi’s statement perhaps came unexpectedly quickly, but the expressed views are hardly unexpected. In short, the ECB has a negative opinion about the legal solution for loans in francs. The ECB, of course, is not a court, but warnings about violations of European regulatory principles are quite a bad signal for the future of this saga, which, by all accounts, is not nearly over, reports Poslovni.hr on September 19, 2015.

To begin with, the ECB recalls that the Croatian authorities had not consulted with them about the proposals, although the agreement on the functioning of the EU provides for such consultations. The main objections are mostly already known, because the Croatian National Bank has already stated them. Therefore, the ECB says that “the conversion of the loans may result in the fall of foreign currency reserves of Croatia, which can have adverse effects on the country’s macroeconomic stability”. Moreover, the conversion may “weaken the functional independence of the Croatian National Bank” given the instruments and objectives of monetary policy.

The ECB remarks that the new laws could have negative consequences on the mood of foreign investors due to, as they claim, perceived increase of legal uncertainties. “Therefore, the ECB suggests that the Croatian authorities thoroughly analyze the possible effects of the introduction of the proposed measures on the economy.” Regarding the retroactive effects of the law, the ECB is quoting the relevant EU directive, according to which member states can further regulate loans in foreign currencies, provided that such regulation does not apply with retroactive effect. “The Croatian authorities should assess whether the retroactive nature of the law is in accordance with Croatian law and constitutional principles.” However, the ECB notes that the introduction of measures with retroactive effect will undermine legal certainty.

As for the impact on the banking sector, the financial costs of the government’s model “can have a negative impact on profitability, capitalization and future credit potential of affected credit institutions”, emphasized the ECB. Thanks to its solid capital “cushions”, the Croatian banking sector has relatively good resistance to shocks, and therefore will remain well above the regulatory minimum. As for the long-term effects on financial stability, “when introducing measures related to resolution and conversion of loans in foreign currencies, governments should always take into account fair burden-sharing principle among all stakeholders, thus avoiding the moral hazard in the future”, concluded the president of the European Central Bank.

 

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