Loans and mortgages in SWISS FRANC became popular in Cyprus after 2006, the year when the Republic was a candidate country to assess the EURO zone. During this particular period, SWISS FRANC loans were attractive because the cost of borrowing was relatively low. Notably, within the period 2006-2009, thousands of investors took loans in SWISS FRANC. Nevertheless, the sudden appreciation of SWISS FRANC towards EURO worsened the position of those investors and caused outstanding losses to borrowers and banking institutions.
Financial and banking institutions should shape their decisions and actions by taking into account the exchange rate fluctuations. Apart from risk assessment, banks are required to inform customers and investors adequately regarding the risks they may face once they decided to take a loan in a foreign currency. Banking and financial institutions are required to consider customers’ ability to comprehend and deal with risks related to exchange rate fluctuations. In addition to this, banks are obliged to warn the customers about potential risks that may emerge. That is to say, the banking institutions must have a transparent approach towards foreign currency loans and provide a detailed information to their customers.
As mentioned above, borrowing in foreign currency is risky because of exchange rate fluctuations which causes fluctuations in the capital itself that the borrower must pay back. Since borrowing in foreign currency embeds a considerable risk Cyprus banking institutions have initially distanced from these kinds of loans. Nonetheless, Cyprus banking and financial institutions have not estimated the complex nature of foreign currency loans and based their actions on the available information they had at a particular period.
The sudden appreciation of SWISS FRANC towards EURO increased the cost of borrowing. Consequently, it created problems regarding the repayment of SWISS FRANC loans. The latter caused considerable losses for banking institutions and consumers. On the one hand, the restructuring of non-performing loans becomes more challenging. On the other hand, consumers encounter serious difficulties to pay back their loans.
In October 2015, rating agency MOODY’S warned that the forced conversion of SWISS FRANC loans and mortgages would cost the banking institutions €250 million and will create ‘moral hazard’. New Cyprus Central Bank’s data demonstrate that non-performing loans are still increasing in banks’ balance sheets. Currently, there are court cases against Cyprus banking and financial institutions that promoted SWISS FRANC loans but have not informed and protected borrowers from the risk of exchange rate hit.
SWISS FRANC LOAN COURT CASES
The majority of SWISS FRANC loans were granted by the Bank of Cyprus and Alpha Bank. Elena Gregoriades, a representative of the Central Bank of Cyprus, maintained that according to Central Bank’s data, the total SWISS FRANC loans granted for the purchase of real estate are estimated to €1.05 billion and affected 3000 accounts. Mrs Gregoriades articulated that a consumer who borrowed in SWISS FRANC in the period 2008-2010 suffered a loss of 30%-40% at the current exchange rate.
Approximately 11.000 borrowers have been affected by the inflation of their loans as a result of SWISS FRANC appreciation towards EURO. Currently, the exchange rate between EURO and SWISS FRANC is 1/1.1. However, most of the consumers borrowed when the exchange rate EURO/SWISS FRANC was more than 1.6. The augmentation of repayment cost and losses are highly associated with the transparency of Cyprus banking institutions concerning the high-quality information about the embedded risks.
It should be pointed out that the European Court rules in favour of the borrowers regarding cases related to foreign exchange loans. The court cases emphasize that European consumers and investors are protected against unclear selling practices in which banking institutions were engaged. In other words, the legislation protects consumers from misinformation and enhances the transparency of banking and financial institutions.
Recently, a historic court decision in Athens judged the loans in SWISS FRANC as non-valid and asked the banks to pay the full extent of the damage caused by a foreign currency hit. Specifically, the loan agreement between the borrowers and the Millennium Bank was judged as invalid. Moreover, the Court judged that the borrowers were not able to assess the risks related to foreign currency loans so the bank should have provided the necessary information and support. The decision of the court ordered the borrowers to pay back SWISS FRANC loans at the exchange rate that applied when the loan was granted and not at the current exchange rate.
The billion euro damage and the regulatory framework urged borrowers to submit lawsuits against certain Cyprus financial and banking institutions. Several Cypriot borrowers or foreign residents of the Republic of Cyprus proceed to legal actions against financial and banking institutions in Cyprus that promoted SWISS FRANC loans without the necessary information concerning the risks they may face.
REVISION OF SWISS FRANC LOANS
Following the ongoing developments, banking and financial institutions are elaborating new and improved plans for the regulation and repayment of SWISS FRANC loans. A representative of the Central Bank of Cyprus asserted that banks agreed to submit revised plans, taking into consideration the interest rate difference, the benefit of the borrower, the amount borrowed and the date of the loan agreement. In addition, banks should provide borrowers with good repayment plans and lower interest rate. However, it should be underlined that the Central Bank of Cyprus cannot proceed to further actions since issues related to systemic banks need the approval of the European Central Bank.
LIMITATION LAW 66 (1) 2012 EXPIRES ON 31ST DECEMBER 2015- BRING YOUR CLAIM NOW
The Limitation Law 66 (1) 2012 sets time limits on which the one party should bring a claim or give notice of a claim to the other party. When the limitation period expires, a party is prohibited from initiating a claim against another party. The law provisions consider different limitation periods according to the nature of the actionable right.
Given that the Limitation Law 66 (1) 2012 expires on 31st December 2015, it means that borrowers who wish to bring a claim against banking institutions within the six-year limitation period, do not have enough time. In other words, borrowers who wish to bring a claim against banking institutions will have to proceed with the necessary procedures by 31st December 2015, unless the Cyprus government proceeds to further extension.
LEGAL AND FINANCIAL ASSISTANCE
As it was analysed before, foreign currency loans and mortgages require proper risk assessment and detailed information. Given the complexity of this particular topic borrowers and investors should seek financial and legal assistance from experts. In the case that banking and financial institutions have not provided borrowers with the adequate support then the borrowers should seek legal guidance regarding the legal actions they will proceed.