The good news, I guess, from today's court ruling in Croatia on mortgages and other loans linked to the Swiss franc is that there is a word for "consumer protection" in Croatian. That should come as a relief to domestic and foreign property buyers alike.
Beyond that, though, there's not much good here.
In a nutshell, the court ruled that is was unacceptable for eight banks to sell variable-rate loans linked to the Swiss franc in Croatia. Most of these loans were mortgages, and as the franc strengthened in the wake of the 2008 global economic crisis and the EU credit crisis, the principal and contractual payments in kuna terms ballooned excrutiatingly. Interest rates also rose as global credit tightened. The eight international banks that offered these loans were nontransparent, the court said, and the borrowers paid the price.
The ruling and logic trouble me on many levels. To start, if the loans were unacceptable on their face--two variable elements, the principal (in kunas) and the interest rate--why did the Central Bank allow them in the first place? One of the fundamental tasks of the Central Bank is to supervise the banking system, and it was no secret that these loans were being offered. It seems nothing at the time triggered any red flags.
More fundamental to the ruling, I struggle to understand what information was hidden from borrowers. That exchange rates move around? Croatia is not like the US where people can live their whole lives and not touch another country's currency. Domestically, the kuna-euro exchange rate is watched closely because most big-purchase items was negotiated in euros, although kunas eventually change hands. Croats are accustomed to crossing national borders and exchanging money, even if it's just to IKEA to buy some bookshelves.
Or was it that the interest rates were variable? These were variable-rate loans. I would be astonished if the mortgage contracts didn't explain what would trigger a change in interest rates. In contracts I've seen--though admittedly outside Croatia--the rate is usually tied to a specific, publicly available rate outside the control of the individual bank, like a country's prime lending rate. If the contracts for the Swiss-franc loans said the banks would change the rates "whenever we darn well please," maybe there's a case. The defense would be that whoever signed such a loan should be deemed unfit to enter a legally binding contract.
Or maybe the borrowers weren't informed that a huge, global economic crisis was on the way and that a handful of European states would teeter on bankruptcy? That's a tough one. Even if the banks forecast a general strengthening of the Swiss franc against the euro, no one expected the magnitude or the longevity of the global crisis. I was hurt by it; you were hurt by it. We have to live with that.
So what vital information was withheld?
Borrowers took these loans because they had lower interest rates than other loans on the market. If they were buying a boat from one dealer that was cheaper than the same boat from another dealer, they would wonder why. The "why" on these loans was because the borrowers were taking on the risk of exchange rate fluctuations and changing credit costs (even if they didn't think about it in such terms), and they discovered risk can be expensive. It's like deciding whether to buy an extended warranty on an appliance: it's cheaper if you assume the risk of your fridge breaking down yourself.
Finally, the ruling implies the eight international banks of sound reputation spontaneously (or worse) decided to mislead their customers in the same way on the same products at the same time. That seems a little far-fetched to me.
I sympathize with anyone hurt by the global and European crises, which is most of us to some degree. But while some bank practices (particularly in the US) can be blamed for the meltdown, I fail to see what the banks did wrong in this case. And if these loans were carried on their books in Swiss francs, they wouldn't have even profited from the situation.
Court decisions should be based on the facts of an individual case and not on its wider consequences, but the broader implications of this ruling should be considered before the country celebrates too strenuously. The ruling could hobble Croatia's banking system and its attempts to restart its economy. Credit is the foundation for commercial and individual investment, and the spectre that a loan that's good today being changed dramatically by some future court is likely to dampen the willingness of banks to loan here. Banks without a presence here will think carefully about expanding into Croatia. And if a lack of transparency is the problem, the solution isn't posing the riddle: When is a contract not a contract?
Beyond that, though, there's not much good here.
In a nutshell, the court ruled that is was unacceptable for eight banks to sell variable-rate loans linked to the Swiss franc in Croatia. Most of these loans were mortgages, and as the franc strengthened in the wake of the 2008 global economic crisis and the EU credit crisis, the principal and contractual payments in kuna terms ballooned excrutiatingly. Interest rates also rose as global credit tightened. The eight international banks that offered these loans were nontransparent, the court said, and the borrowers paid the price.
The ruling and logic trouble me on many levels. To start, if the loans were unacceptable on their face--two variable elements, the principal (in kunas) and the interest rate--why did the Central Bank allow them in the first place? One of the fundamental tasks of the Central Bank is to supervise the banking system, and it was no secret that these loans were being offered. It seems nothing at the time triggered any red flags.
More fundamental to the ruling, I struggle to understand what information was hidden from borrowers. That exchange rates move around? Croatia is not like the US where people can live their whole lives and not touch another country's currency. Domestically, the kuna-euro exchange rate is watched closely because most big-purchase items was negotiated in euros, although kunas eventually change hands. Croats are accustomed to crossing national borders and exchanging money, even if it's just to IKEA to buy some bookshelves.
Or was it that the interest rates were variable? These were variable-rate loans. I would be astonished if the mortgage contracts didn't explain what would trigger a change in interest rates. In contracts I've seen--though admittedly outside Croatia--the rate is usually tied to a specific, publicly available rate outside the control of the individual bank, like a country's prime lending rate. If the contracts for the Swiss-franc loans said the banks would change the rates "whenever we darn well please," maybe there's a case. The defense would be that whoever signed such a loan should be deemed unfit to enter a legally binding contract.
Or maybe the borrowers weren't informed that a huge, global economic crisis was on the way and that a handful of European states would teeter on bankruptcy? That's a tough one. Even if the banks forecast a general strengthening of the Swiss franc against the euro, no one expected the magnitude or the longevity of the global crisis. I was hurt by it; you were hurt by it. We have to live with that.
So what vital information was withheld?
Borrowers took these loans because they had lower interest rates than other loans on the market. If they were buying a boat from one dealer that was cheaper than the same boat from another dealer, they would wonder why. The "why" on these loans was because the borrowers were taking on the risk of exchange rate fluctuations and changing credit costs (even if they didn't think about it in such terms), and they discovered risk can be expensive. It's like deciding whether to buy an extended warranty on an appliance: it's cheaper if you assume the risk of your fridge breaking down yourself.
Finally, the ruling implies the eight international banks of sound reputation spontaneously (or worse) decided to mislead their customers in the same way on the same products at the same time. That seems a little far-fetched to me.
I sympathize with anyone hurt by the global and European crises, which is most of us to some degree. But while some bank practices (particularly in the US) can be blamed for the meltdown, I fail to see what the banks did wrong in this case. And if these loans were carried on their books in Swiss francs, they wouldn't have even profited from the situation.
Court decisions should be based on the facts of an individual case and not on its wider consequences, but the broader implications of this ruling should be considered before the country celebrates too strenuously. The ruling could hobble Croatia's banking system and its attempts to restart its economy. Credit is the foundation for commercial and individual investment, and the spectre that a loan that's good today being changed dramatically by some future court is likely to dampen the willingness of banks to loan here. Banks without a presence here will think carefully about expanding into Croatia. And if a lack of transparency is the problem, the solution isn't posing the riddle: When is a contract not a contract?
Oh boy! What a mess... the situation that is. Your article is great.
ReplyDelete