Sigrún Davíðsdóttir's Icelog

Loans in foreign currencies, widely issued by Icelandic banks during the boom, turned into a major liability when the banks collapsed, dragging the Icelandic krona down. But forex loans have been a liability elsewhere, i.a. in Croatia where borrowers formed an organisation and sued banks, issuing forex loans, for misleading information. The Franc organisation has now won a case against the banks but the case will now go to an appeal court.

Forex loans issued by the Icelandic banks during the boom times before the collapse in 2008 were popular because the interest were much lower than Icelandic interest rates, which mirrored the inflation in Iceland. These loans were mostly used for buying cars, less for mortgage though not unknown there. It seemed like a brilliant idea at the time since the Icelandic krona was strong. Historically, the strong krona was anomaly but the banks did not dwell much on that fact.

After many court cases it has now been established that it is illegal to bind interest rates in Iceland to anything but Icelandic interest rates, not to foreign rates but lending in foreign currency is legal. The thousands of loans issued were variously documented, some legal, others not. The banks have been obliged to recalculate forex loans, binding the interest rates to the CBI rates, much lower than the general lending rates. Some people got lucky there, others not.

In Croatia there were similar circumstances – domestic rates were higher than i.a. Swiss rates so banks started offering loans in Swiss francs. The the Croatian “kuna” collapsed these loans turned into serious liabilities. Contrary to Iceland, where the plight of forex borrowers caused great consternation among politicians, Croatian politicians have mostly been wholly unsympathetic to these borrowers, telling them squarely they should have been better informed and borrowing always implies risk.

In order to advocate their cause the borrowers formed an organisation, Franc organization and sued eight banks, on grounds of consumer protection, pleading that the banks had not informed people properly about the risk. People were given loan contracts of many pages but told they did not need to read it. After privatisation of the banks most Croatian banks are now owned by foreign banks, as can be seen by the eight banks sued: UniCredit – Zagrebačka Banka, Intesa SanPaolo – Privredna Banka Zagreb, Erste & Steiermärkische Bank, Raiffeisenbank Austria, Hypo Alpe-Adria-Bank, OTP Bank, Société Générale – Splitska banka and Sberbank formerly Volksbank.

Although the Croatian court system leaves much to be desired this case has already been ruled on – and Franc won. The case is not quite over though as will now go to an appeal court.

One thing that has made these loans such a liability, as pointed out to me by some of those involved with Franc, is Croatian law on bankruptcy, which has no time limit, meaning that once bankrupt, eternally bankrupt. Loans are not written off or written down and claims live forever. One thing Croatian politicians should definitely look into.

*Here is a report in Icelandic I did on the Croatian loans 17.8. 2012 after I had talked to Petra Rodik, one of Franc’s founders and Franc’s lawyer Nicole Kwiatkowski.

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