Retroactive laws, sluggish courts are biggest blows to creditor rights in CEE
|Retroactive FX loan conversion and drop in key initiatives reduce creditor rights, while new consumer protection laws try to institutionalize and speed up debt resolution/rescheduling
‘Have creditor rights been strengthened or weakened in CEE countries in recent years?’
Croatia: Investor protection in Croatia was one of the hottest topics in the last couple of years and the overall picture is relatively blurry. On one hand, introduction of pre-bankruptcy (out-of-court) settlements in 2013 and changes to a bankruptcy law implemented in 2015 brought some improvements, which are reflected in the Doing Business data. On the other hand, the forced conversion of CHF loans significantly shook investors’ confidence, as the Croatian government deliberately endangered EU laws and enforced the principle of retroactivity in the legal system. However, according to statements from the PM’s cabinet and Ministry of Finance, the new Croatian government should have a ‘pro-investor’ orientation.
Czech Republic: No major changes in creditor rights have taken place recently in the Czech Republic, at least regarding existing loans. This is probably because credit quality has not been as big of an issue as in other countries and there is little political pressure to interfere in (existing) creditor rights. However, there are some changes in terms of new credits - namely, the Mortgage Credit Directive has been transposed into Czech law this year, which will put a greater administrative burden on creditors and bring new rights for debtors, e.g. early repayment of loans.
Hungary: Since the financial crisis hit Hungary, the financial sector has been struggling with increasing NPL stock and the hindering measures taken by the government. Even though there has been some consolidation in the relationship between the government and financial sector recently, as the tax levy was cut in 2016 and the moratorium on evictions was lifted this March, banks might remain reluctant to increase their lending activity, especially in mortgages, not just because the demand of households may be lackluster, but due to the uncertain business environment and unpredictable legislative processes. The latter two are underpinned by the competitiveness rankings from the WEF, as the strength of investor protection and efficiency of the legal framework in settling disputes in Hungary is quite far behind.
Poland: Despite the worsening investment climate in Poland, creditor rights seem to be well protected. According to the Global Competitiveness Index, Poland scores high in such categories as the strength of investor protection (ranking 32 out of 140) and legal rights (24 out of 140), while Doing Business points out that the recovery rate has been continuously growing and stands at 58.3 cents on the dollar. Furthermore, pro-business amendments in the New Bankruptcy Law (in force since January 2016) should solve the main drawbacks of the bankruptcy process, such as lengthy procedures and their high costs. Although the government feels willing and committed to help FX borrowers, fully-fledged FX conversion is unlikely, while the return of FX spreads to debtors seems to be the major part of the relief program.
Romania: Romania has witnessed a string of legal initiatives aimed at strengthening debtors’ rights ahead of December parliamentary elections. A law that enables retail customers to return real estate collateral to banks in exchange for writing-off their loans entered into force in May and more than 4,000 people have taken advantage of it so far. This week, the Romanian Parliament could vote on a law on the conversion of CHF loans at the historical FX rate. The personal insolvency law will enter into force at the end of October and should allow people to postpone the payment of debts for a period of five years, based on a judicial reorganization plan. The payment discipline of retail banking clients has been significantly better than that of corporate customers, with the NPL ratio at 9.1% in December 2015 for private individuals and 26.2% for non-financial companies.
Serbia: Although the overall business environment in Serbia has improved in recent years, we still see a lack of progress in the legislation related to investors' rights and protection. Doing Business data for 2016 shows that Serbia kept a relatively low 73rd place in enforcing contracts and fell from 49th to 50th in resolving insolvency. Similarly, WEF data indicates that property rights stayed unchanged at relatively low levels (3/7), while the legal rights index even worsened slightly. However, with draft changes and amendments to the Bankruptcy Law and an active NPL resolution strategy (which should be implemented during the year), we could see some improvements ahead, but strong efforts are still needed.
Slovakia: The World Bank reports cite law enforcement as a vital area for improvement. Their 2015 findings on contract enforcement show that the average time taken to resolve a dispute was 705 days in Slovakia, as opposed to the OECD average of 538.3 days. Recently, the Ministry of Justice presented legislative changes that simplify the personal bankruptcy procedure and should unburden the courts. According to the Ministry of Justice, there were 32tsd personal bankruptcy requests in the Czech Republic in 2015, but just 391 in Slovakia. The changes will allow more people to return to normal life via personal bankruptcy or a repayment calendar, but only once in 10 years. Some potential for moral hazard may exist, but it is fairly limited.
Slovenia: Slovenia is one of the top performers in the CESEE region when looking at GCI and DB data related to investors’ rights, as the strength of investor protection is at relatively high levels (GCI rank 14) and the legal framework seems to be stable and predictable. In recent years, Slovenia has made additional progress on all fronts, with the biggest improvements recorded in resolving insolvency procedures (time and recovery rates) and efficiency of the legal framework in settling disputes. Looking forward, we expect the government to keep this track record and we will probably see additional gradual improvement in this institutional quality sphere.
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