(Bloomberg) -- Croatia’s next cabinet should pursue an agreement with banks over a 2015 law that makes them pay for converting Swiss-franc loans before more lenders follow the example of UniCredit SpA and take the country to court, said Zdenko Adrovic, the head of the Banking Association.

In an echo of a predicament playing out across eastern Europe, the association said Croatian banks were stuck with as much as 7.6 billion kuna ($1.1 billion) in costs over the law, which obliged them to convert franc loans to euros according to the exchange rates under which they were issued. UniCredit, one of eight foreign banks with units in Croatia, filed an arbitration claim on Sept. 16 at the International Center for the Settlement of Investment Disputes.

The dispute will be the first big test for the next Croatian government following September elections. The conservative HDZ is now in coalition talks with the Bridge party of independents and mayors and other smaller political groups. While any administration that emerges from the talks may still find a compromise with the banks, time for an agreement may be running out, according to Adrovic.

“We don’t have a lot of time at our disposal,” Adrovic said in an interview on Tuesday in Zagreb. “The situation will change once the next three or four or five banks start arbitration procedures, and we know that several banks have already prepared for that.”

He didn’t specify which banks had started preparations. Other foreign-owned lenders in Croatia include units of Erste Group Bank AG, Intesa Sanpaolo SpA, Raiffeisen Bank International AG, OTP Bank Plc and Societe Generale SA.

Franc Feud

While Croatia’s currency, the kuna, is pegged to the euro, mortgages and consumer loans in francs surged before the economic crisis erupted in 2008 because they offered lower interest rates. After Swiss policy makers lifted a cap on currency gains last year, the franc surged, causing a spike in loan payments for those paying back in kuna. Shortly before a general election last year, former Prime Minister Zoran Milanovic pushed through a law forcing banks to convert about $3.4 billion of franc loans into euros to help borrowers cope.

The move follows wrangling between governments and lenders in Hungary, Poland, Romania and other countries as policy makers try to alleviate pressure on borrowers without destabilizing financial sectors. In Croatia, banks opposed the legislation and, separately, the European Commission started an infringement procedure, saying the law violated EU norms.

Zdravko Maric, finance minister in Croatia’s outgoing government, said in September that the Adriatic country is looking into a possible agreement with banks. Bridge party leader Bozo Petrov said last week that his party and HDZ are discussing possibly introducing a tax on lenders’ assets as part of a resolution. Adrovic called the current law “radical,” and said that Croatia, unlike any other country in the European Union, had passed it without consulting the European Central Bank or the European Commission.

“We have exchanged information with the government, but I wouldn’t say the negotiations have started yet,” Adrovic said. If the next government does impose taxes on bank assets, each foreign lender could hypothetically “seek to protect its investment in Croatia and could merge a Croatian unit with a parent bank abroad, leaving in Croatia a retail network that wouldn’t hold any assets,” he said.

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at To contact the editors responsible for this story: James M. Gomez at, Michael Winfrey, Andras Gergely

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