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Croatia's government on Wednesday endorsed a letter which it needs to send to the European Commission by the end of the month regarding the conversion of Swiss franc loans.

The Commission on June 16 sent Croatia an official letter of warning regarding its law on the conversion of loans pegged to the Swiss franc into euro-denominated loans, claiming the conversion law shifted all of the conversion cost onto banks and that its retroactive application jeopardised the principle of legal security.

"Usually, the contents of the correspondence with the European Commission are not disclosed in cases like this," the government's press release reads today.

A letter with a formal warning is the first step the Commission takes against a country it believes has violated EU law. If the country fails to reply to the letter or fails to provide a satisfactory explanation in its reply, the Commission takes the second step, a reasoned opinion. If after that there is still no satisfactory response, the Commission may approach the Court of the EU.

Speaking to the press after the government's session, Finance Minister Zdravko Maric said that Zagreb had tried to provide exhaustive answers to the EC letter.

"However, it is possible that the Commission will ask for additional explanations. And we are ready to provide them too," Maric said.

He also noted that the matter of the jurisdiction of the Washington-based International Center for the Settlement of Investment Disputes (ICSID) had not be a topic of Croatia's answer.

Italy's UniCredit announced recently that it would file a suit against Croatia at the ICSID in Washington because of the conversion of CHF loans. This prompted the Franak association, which brings together holders of those loans, to contend that UniCredit, the owner of Zagrebacka Banka (ZABA), had no grounds for arbitration over Croatia's law on the conversion at the ICSID.

"The law has been consumed. We are now facing the consequences. On the one hand, this is communication with the EC, on the other hand it is communication with the banks. We will seek solutions through talks, having in mind the basic postulates such as the protection of tax payers as well as of the state budget and national interests," Maric said.

A Deputy Prime Minister in the caretaker government, Bridge party leader Bozo Petrov, said today that the government would take care of the protection of Croatia's interests regarding this issue.

The amended Consumer Credit Act, which enabled the conversion of CHF-denominated loans, took effect on September 30 last year. According to information from the Finance Ministry in mid-2016, over 58,000 debtors had such loans in the total amount of HRK 20.9 billion. Ninety-four percent of the debtors accepted the conversion scheme and 85% of them have converted their loans. The balance of CHF-denominated loans after the conversion in mid-2016 is HRK 15.4 billion. The effect of the conversion, i.e. the reduction of the loan principals, is HRK 6.6 billion, and if the effect of overpayment is added, the amount increases to HRK 7.6 billion.

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