Finance Minister Zdravko Maric said on Tuesday the inner cabinet discussed a letter which it needs to send to the European Commission by the end of the month regarding the conversion of Swiss franc loans and that the government would endorse it at tomorrow's session and send it.

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.

The initial deadline for a reply to the letter was August 16 but was extended to September 30.

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.

The Commission objects that the law adopted by the Croatian parliament allows all loan holders (except for legal persons) to retroactively convert loans pegged to Swiss francs into euro loans in line with historical exchange rates, regardless of their ability to repay those loans. That makes loan conversion costs fall entirely on creditors. The Commission believes that it is necessary to strike a balance between the interests of consumers and the need to protect the single capital market and its legislative framework.

Speaking to the press after the inner cabinet session, Maric would not talk about the content of the government's reply to the Commission, saying "there's a certain EU practice not to reveal details in such pre-court cases."

He reiterated that the government would always advocate national interests, protecting taxpayers and the state budget.

Asked if the ministers of both the HDZ and Bridge parties had been agreed about the content of the reply, Maric said they had. "You'll see at the government session tomorrow during the vote."

Asked about proposals "to use a heavy took over banks" such as imposing a tax on assets, he would not speculate, saying that in negotiations with banks it was necessary to protect national interests. "If we succeed in that, we will be satisfied. If not, we will look at other options."

Italy's UniCredit, which owns Zagrebacka Banka, one of eight banks in Croatia which offered loans denominated in Swiss francs, has recently announced that it will sue Croatia over the conversion at the International Center for the Settlement of Investment Disputes in Washington.

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.

(EUR 1 = HRK 7.5)

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