Legislators in Slovenia will vote on Monday on a measure to make banks repay hundreds of millions of euros to foreign currency borrowers, with lenders warning that the measure would undermine their operations in the Alpine nation.
Slovenia was one of a number of eastern European countries where consumers seized on the opportunity to borrow at low interest rates more than a decade ago in currencies such as the Swiss franc, only to face a big hit when exchange rates moved against them during the financial crisis.
In response, several governments placed limits on repayment exchange rates or converted the loans to local currency.
Ljubljana has not yet introduced such measures but the bill coming before legislators would place a retroactive cap on the extra burden that was faced by borrowers, forcing lenders to pick up the costs instead.
Banks would have to redefine repayment terms and cap exchange rate losses for borrowers at 10 per cent, repaying them for any extra costs incurred going back to 2004.
In a letter this month, banks told the government and European institutions that they expected a “negative impact on the profitability, capitalisation and future lending capacity of the banking sector as a whole” if the measure is approved.
“We urge you to act within your powers . . . to ensure the Slovenian economy [operates] in conditions consistent with the EU principles,” the banks wrote in the letter. “Legally valid contractual agreements [must] not be subjected to legislative interventions.”
The bill calculates that it might cost banks a total of €300m to compensate borrowers for exchange rate losses above and beyond the 10 per cent limit. Banks predict that the sum may be significantly higher and said they would go to local and EU courts to fight the obligation.
The bill threatens banks with penalties and potential revocation of banking licences if they fail to repay borrowers on time. Lenders and regulators fear that it could undermine the country’s financial system.
The banks involved include Hungary’s OTP, Austria’s Addiko Bank and Erste Bank, Russia’s Sberbank and Italy’s UniCredit.
Slovenia’s banks are hoping that the country will not go ahead with the move, pointing out that it would contradict an opinion issued by the European Central Bank, which described the bill as problematic late last year.
The ECB warned of “substantial pressure on the income of credit institutions” and said the bill as drafted could cause “a deterioration in both foreign and domestic investor sentiment, and trust in the system, due to a perceived increase in legal uncertainty and country risk”.
This was the ECB’s opinion on the draft law and was not binding. If the Slovenian bill passes, the European Commission could decide to challenge it in court. The ECB declined to comment.
The bill was first submitted last year by the chair of the upper house of Slovenia’s parliament and unexpectedly made headway this month. Banks fear that politicians may want to approve the bill to create a windfall for consumers ahead of elections in April.
The Frank Association, a consumer group which supports the bill, said it was “the result of banks’ persistent evasion of any responsibility for their unfair business practices in the past and their unwillingness to settle with borrowers”.
“The adoption of the law can only have positive effects on the economy,” it said, adding that similar laws, for instance in neighbouring Croatia, cut household debt and increased consumption.