Loan conversion won’t affect banks’ lending capacity


The conversion of Swiss franc-pegged loans into euros is unlikely to affect the lending capacity of banks operating in Croatia to finance the recovery and offer loans, sources from the European Commission said on Thursday.

There is a minor risk, but it is not our baseline scenario. Our baseline scenario is that the conversion measure will have no direct impact on the banks’ lending capacity, a source from the European Commission said after the EC published its Autumn 2015 Economic Forecast.

According to unofficial sources, an effect of the conversion would be a rise in the income of households, which will consequently have a positive effect on consumption, an important component of the GDP.

“The recent decision to convert CHF mortgage loans into euros is likely to have a minor positive impact on consumption, as households still face pressures to reduce their debt levels. Banks’ losses are set to result in an imputed negative flow of reinvested earnings, pushing the current account surplus to above 4% of GDP in 2015, while a negative impact is expected on public finances,” reads the EC Forecast.

Another effect will be produced on the transfers balance. Given that this measure will deprive foreign-owned banks of a profit which they have sent to their countries of origin, there will be no transfers outflow, and thus a surplus in the transfers balance would be higher than usual. This is, however, a short-term measure visible in 2015 only, the source from the Commission said.

On the other hand, the conversion measure would negatively affect budget revenues mainly in 2016 given that lenders will not post profits and consequently they will not pay profit tax, which amounted some 700 million euros last year, or 0.2% of GDP.

The sources from the Commission said that the Commission had hesitated whether to enter this conversion measure into the Autumn 2015 Economic Forecast, given that the decision on the conversion entailed uncertainties and the Croatian Constitution Court is yet to give its opinion.

Eventually, we decided to enter it (into the Forecast), as the measure is in effect, and if it is quashed, we will make a new analysis, the Commission’s sources said.

On 7 October, the European Commission launched a pilot-procedure to collect information about the conversion measure, which is a preliminary stage in launching a procedure against a member-state if the measure proves to be in contravention of European Union rules.

The European Commission on Thursday upgraded Croatia’s economic growth forecast for this year to 1.1 percent from May’s forecast of 0.3%, but called for implementing structural reforms in order to stop public debt growth.

The general government deficit is projected to decrease from last year’s 5.6% of GDP to 4.9% this year, to 4.7% in 2016 and 4.1% in 2017, the Commission said, while the general government debt-to-GDP ratio is projected to continue rising from 89.2% in 2015 to 91.7% in 2016 and to 92.9% in 2017.

The public debt is not rising at a rate previously forecast for two reasons: one is a higher denominator given that the economy is growing and thus a portion of the debt is falling, and the other reason is a deficit lower than previously expected. Croatia does not have the highest debt in the European Union, however, its debt is a factor for concern when you see the interest Croatia is paying, the source from the Commission said.