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Taking out loans in Swiss francs has long been popular in Eastern Europe. The low interest rates made them an especially popular choice when financing real estate purchases. Twenty percent of all mortgages in Slovenia are in Swiss francs and in recent years Slovenians have even started using the currency to buy cars.
But what was once a guarantee of low interest rates has turned into anything but. When the crisis in the Eurozone started this year the value of the Swiss franc rocketed. The currency gained almost 25 percent against the euro. Borrowers that took loans in the Swiss currency have seen a similar rise in their repayments.

Early warning

Slovenians are not alone in their suffering. Loans in Swiss francs are widespread throughout East and Southeast Europe - sixty percent of home loans in Hungary are in the currency - and several municipalities in the south of France, like the town of Saint Tropez, also chose loans pegged to the franc.
In fact, in some respect Slovenians may be better off than those in other areas who chose to go Swiss. The reason? Early and repeated warnings of the problems ahead. The Central Bank of Slovenia first raised concerns in a report in early 2005. Because lending in Swiss francs remained popular, it stepped up efforts in July 2006, sending out a warning letter to all banks in the country. The letter instructed banks to inform their clients of the risks of borrowing in a foreign currency.

A long battle

At the end of 2006 a fifth of all housing loans in Slovenia were in Swiss francs or pegged to the currency. According to the Central Bank, the loans then became a non-negligible credit risk for banks. Despite further warnings the popularity of the loans didn't cease. In May 2008 the Central Bank reported that the share of housing loans in Swiss francs exceeded 30 percent and was still increasing. This was termed an "undesirable risk".
With extra warnings, a brochure on borrowing in foreign currencies, and considerable media attention on the issue, the Central Bank continued to fight the popularity of loans in Swiss francs. It seems the warnings eventually worked. In 2009 the amount of loans in Swiss currency stood at EUR 1,891m, last year saw already a small drop to EUR 1,868m, and in February of this year the amount decreased further to EUR 1,747m.
Now some institutions, like KD Banka, simply don't offer any loans in or pegged to the Swiss franc. For those who are already in the Swiss trap, banks say they are willing to help find solutions. Options include a deferral of payments, extended repayment periods, changing the currency of the loans back to euros, or a loan moratorium.

Taking matters in their own hands

The Swiss are trying to seek solutions to the issue too since their strong currency is not only harming foreign borrowers but also the domestic economy. Export and tourism are suffering because Swiss products and services have become significantly more expensive for foreigners. Last month the country's central bank issued an unusually strongly worded statement expressing a dedication to decreasing the value of the Swiss currency. It said that the "current massive overvaluation" of the currency posed "an acute threat" to the country's economy: "The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF (Swiss franc) exchange rate below the minimum rate of CHF1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
Borrowers will be hoping these measures have an impact.