Loans in Swiss and new course Progreso
In September 2011, the Swiss National Bank (SNB) introduced a lower foreign exchange rate limit of 1.20 francs for one euro to prevent further strengthening of the domestic currency.
At the extraordinary meeting of the Board of Directors held on January 16, 2015, the SNB abolished the lower limit against which the Swiss franc was exchanged for the euro.
Loans in Switzerland are becoming more expensive in Croatia. But what does the mechanics of this price increase look like, and what are the possible solutions?
Why is the Swiss growing?
The weakening of the euro against the US dollar caused the Swiss franc to weaken against the US currency. Therefore, the SNB believes that the overvaluation of the franc has decreased. Thus, the Swiss economy is able to adapt to current market conditions, and there is no need to maintain a fixed minimum level of the exchange rate.
One of the consequences of the recent low oil price is the increase of the US dollar in the global market. The surplus of the US dollar in the hands of wealthier Russian citizens is used to invest in assets (such as the Swiss franc), which should increase their income in the future. So, the money that came from outside in Switzerland was putting pressure on and there was “inflation” of the local currency.
Global financial markets have reacted vigorously to the lifting of the exchange rate lower boundary, leading to the Swiss franc strengthening by almost 40.00% against the euro. Currently, the exchange rate has stabilized at a ratio of 1.03 Swiss francs to one euro, which represents a strengthening of the Swiss currency by about 15.00%.
Position of home loan beneficiaries indexed in Swiss francs
Given that part of the loan portfolio in Croatia is placed with the Swiss franc currency clause, the latest movements in the exchange rate raise the monthly annuities of repayment of these loans.
The Croatian National Bank (CNB) has no influence on the exchange rate of the Swiss franc and the kuna. Namely, the CNB has decided to peg the kuna to the euro, since most deposits and loans in Croatia are indexed to the euro currency clause. Why are Croatian deposits and loans indexed by a currency clause?
The historically induced and, for a long time, unfounded, fear of hyperinflation of the domestic currency is the reason why citizens are saving in euros, and the consequence is the placement of loans with the euro currency clause.
At the end of 2014, the Swiss franc loans accounted for about 16.00% of the total loan amount. The Swiss francs are the most represented in housing loans and account for about 38.00% of the amount of home loans.
Borrowers who have borrowed in francs have
On average, not paid higher annuities to date than borrowers with the euro currency clause.
If the franc was kept at HRK 6.39 and the interest rate at 3.23%, in the case of direct conversion of loans in francs into local currency, loan beneficiaries in Swiss would on average repay almost the same amount of loans as citizens who have contracted a kuna loan.
The calculation for each individual borrower depends on the year of contracting and the maturity of the loan. Part of the loan beneficiaries in the Swiss would pay a higher amount of the loan under current conditions, but there are also those who would ultimately benefit.
Thanks to the favorable interest rate and the low exchange rate, which are woven into the monthly repayment installment, the citizens have chosen the currency to increase the Swiss franc’s own credit and to borrow ten years ago beyond their means. Therefore, today, the main problem for citizens is an increase in the monthly installment of repayment in comparison with the contractual annuity contract.