Around 2008, Croatia went into a crisis. Many people had taken out mortgages written out in Swiss Francs to buy their homes. This means that they had to pay their mortgage installments in Croatian Kuna (HRK) the amount due in CHF every month, which means payments fluctuated with the exchange rate. This banking practice is part of carry trade. Profit is made by taking currencies with low interest rates and then using them to buy currencies with higher rates. Salaries of course remained in HRK. The CHF became stronger, which meant that the mortgages got more expensive with time. Then in 2008, the Swiss government decided to cap the CHF because it had gotten too strong to make Swiss exports competitive on the world market. Although the cap was set at lower than at its peak, it was still much higher than the rate when most of the mortgages were written. Existing loans became about 30% more expensive. Some people went into default, had their homes repossessed and lost everything.

Roughly 8 out of 10 of the biggest banks in Croatia are foreign owned – mostly Austrian. Would this disaster have occurred without the presence of foreign banks? I have been wondering to what extent this affects the Croatian economy, since banks are in the business of making money, and a domestic bank wouldn’t guarantee that citizens’ interests are better protected. So I spoke with a Croatian sociologist who did a lot of research in the Swiss Franc crisis in Croatia. It does have an effect.

A domestic Croatian bank would not have had the resources and network for carry trade to this degree. In fact Austrian banks were known for investing in the Central European markets (because of their history with the region) and writing many of these CHF loans for households. Other countries like Hungary and Poland were also affected.