As a result of new mortgage and consumer loan conversion legislation in Croatia and Poland, foreign investors in the financial sectors of those countries may soon suffer substantial losses. Many of those affected investors, however, may be entitled to compensation under Croatia's and Poland's numerous bilateral investment treaties ("BITs"). This Commentary provides an overview of the proposed legislative changes in Croatia and Poland, and describes the international remedies that may be available to investors seeking shelter from their effects.

Overview of the New Legislation

Since the early 2000s, some Eastern European countries, including Croatia and Poland, have permitted banks and other financial institutions to issue mortgages and consumer loans denominated in Swiss francs ("CHF") as an alternative to doing so in local currency. CHF-denominated loans were attractive because they offered lower rates than those issued in local currency.1 Croatia has approximately 55,000 CHF-denominated loans outstanding. Most of these loans were taken in the early 2000s for mortgages or purchases of commercial property. 2 According to the Croatian national bank, the value of these loans is 23.1 billion kuna, which is the equivalent of US$3.38 billion. 3 CHF-denominated mortgages account for 38 percent of all mortgages in Croatia. 4 Likewise, between 2007 and 2008, more than 500,000 Poles took out home loans denominated in CHF, hoping to benefit from low interest rates.

In January of this year, however, Switzerland eliminated its cap on the CHF; consequently, that currency quickly began to surge. As a result, debtors holding CHF-denominated loans in Croatia and Poland have seen a drastic increase in the amount of local currency they need to pay to their creditors in order to satisfy their CHF-denominated loans.

The governments of Croatia and Poland have proposed legislation to address this developing situation. The Croatian government enacted a special law freezing the exchange rate for these loans, for a year, at 6.39 kuna per CHF, which is below the current market rate of 6.88 kuna per CHF yet still higher than the prevailing rates when most loans were taken out. 5 In September 2015, the Croatian government proposed a change to consumer credit laws in order to enforce conversion of CHF-denominated loans into euros. The law became effective at the end of September 2015. 6 Under this conversion law, banks will absorb the full cost of conversion, although they may be partly compensated through tax deductions. 7 Croatia's conversion law likely will have a retroactive effect. According to the European Central Bank ("ECB"), "the purpose of the law is to place borrowers of CHF loans in the position that they would have been in had their loans, from inception, been denominated in Euros [or Kuna]." 8 Additionally, the ECB is of the view that "the retroactive effect of the law is not in line with the general aim and principle of Directive 2014/17/EU," 9 which "allows Member States to further regulate foreign currency loans, on the condition that such regulation is not applied with retroactive effect." 10 The ECB therefore noted that if the draft law is introduced with retroactive effect, it would "undermine legal certainty." 11

In Poland, the lower house of Parliament passed a draft law that would convert all CHF-denominated mortgage loans to zlotys with the exchange rate of the CHF recorded on the day of the conversion. The bill provided that banks would take on 90 percent of the costs of such conversions. On September 8, 2015, however, the upper house of Parliament voted to amend the bill on conversion of CHF-denominated mortgages into zlotys so that the costs would be shared 50–50 by banks and mortgage holders. As a result, the bill has been sent back to the lower house for further discussion and a vote. Regardless of whether the bill that is ultimately passed includes a 50 percent or a 90 percent cost burden on financial institutions, the effect on banks will be substantial.

The Financial Impact of the Legislative Changes

The banking sector in both Croatia and Poland is composed mostly of foreign banks that own local banks or have a local branch. For example, more than 90 percent of all local banks in Croatia are owned by parent banks in the European Union. 12 Similarly, around 60 percent of Poland's banking sector is owned by foreign groups.

Foreign-owned Croatian banks hold a large portion of the 55,000 CHF-denominated loans outstanding in Croatia. According to Croatia's central bank, the cost of the conversion to these banks will be "tangibly higher" than the originally assessed US$895 million. 13 Polish banks hold Swiss franc portfolios worth nearly 144 billion zlotys, which is equivalent to 8 percent of the country's GDP. The National Bank of Poland estimated the losses incurred by banks due to the Polish bill at 21 billion zlotys (US$5.6 billion). Consequently, in the best case scenario, assuming that Poland's final bill provides for half of a restructured CHF loan to be written off by banks and the other half to be repaid by borrowers, the cost to banks would amount to nearly 10 billion zlotys (US$2.25 billion). But, if the final bill holds banks responsible for 90 percent of the conversion costs, the estimated cost to banks would be 20 billion zlotys, or nearly US$5.5 billion.

Whether the banks are asked to assume 50 percent, 90 percent, or 100 percent of the loan conversion cost, the legislative changes would still have a negative impact on the profitability and value of their investments in Croatia's and Poland's banking sector. Past experience in investor–state arbitration shows that foreign investors negatively affected by currency conversion policies may have recourse under international law. For example, Argentina's policy of "pesification" of its financial liabilities, through the termination of the currency board that had pegged the peso to the U.S. dollar, negatively affected the value of investments owned by foreign investors, and resulted in more than 40 arbitrations against Argentina. 14 Several of these arbitrations have culminated in awards in favor of the foreign investors. 15 Accordingly, foreign investors in Croatia and Poland likely will have recourse to international remedies through investor–state arbitration as provided by the available BITs.

What Are the International Remedies?

Investor–state arbitration is an attractive option for aggrieved investors. This regime provides a specialized and neutral forum in which to bring disputes against a state for its sovereign acts. It is often not necessary to exhaust local remedies or to commence any domestic litigation before bringing an investor–state arbitration. However, an investor's ability to bring a claim may depend upon the ownership structure of the affected investment vehicle.

Some investors will have recourse through BITs. Poland has 60 BITs in force and Croatia has 47, notably with capital-exporting states such as the Netherlands, Austria, Germany, Spain, the United States, and Italy. 16 BITs are designed to promote and protect investments by investors of the other state party to the treaty. Most BITs protect a broad range of investments, which encompass all assets. Foreign groups operating banks in Poland and Croatia typically hold shares in a locally incorporated branch or have acquired a local preexisting bank17—such investments are likely to fall within the protection of investment treaties. Foreign financial institutions that have issued CHF-denominated mortgages in Poland or other loans in Croatia, but that do not have a physical presence in those countries, might also benefit from investment treaty protections if the relevant treaty includes loans and claims to money as covered investments. 18

Access to arbitration under a particular treaty will depend upon an investor's nationality in one of the signatory states. In this context, nationality is typically determined by the claimant's place of citizenship and/or incorporation. Many BITs permit investors to make claims for directly or indirectly held investments as well as minority shareholdings. Thus, parent companies or individual shareholders are often able to assert rights relating to an investment held through a subsidiary company. Some treaties also provide that juridical persons incorporated in the host state but controlled by nationals of the other contracting state may be treated as foreign nationals for the purpose of making an investment arbitration claim.

There are a number of substantive protections provided under BITs as well. The fair and equitable treatment standard is the most frequently invoked standard in investment disputes and is likely to be the strongest claim in the type of dispute explained above. The standard is fact-specific and may be breached by a state's actions or omissions that violate the investor's legitimate expectations relied upon by the investor to make the investment. 19 The investor's legitimate expectations can be based on the host state's legal framework, contractual undertakings, and any undertakings and representations made explicitly or implicitly by the host state; changes in the legal framework may also be considered breaches if they represented a reversal of assurances made by the host state to the foreign investor. For example, the retroactive effect of Croatia's draft law would, at least according to an opinion by the ECB, offend the principle of legitimate expectations and likely support any fair and equitable treatment claim. 20

Investors who have seen their entire investment wiped out, or almost entirely wiped out, might also have recourse to the protection against illegal expropriation. Most BITs require that the expropriation of foreign-owned property must be: (i) for a public purpose; (ii) nondiscriminatory; (iii) in accordance with due process; and (iv) accompanied by prompt, adequate, and effective compensation equivalent to the fair market value of the expropriated investment before the expropriation became known. A government measure that did not comport with these requirements would constitute an expropriation if it effectuated a permanent loss of the economic value of an investment.

Host governments also are required, under international law, to provide full protection and security to the foreign investor and/or its investment. Traditionally, these protections referred mostly to the physical protection of an investment against interference by the use of force. This interpretation, however, has evolved to include the legal protection of the investment as well. 21 Changes in the legal framework likewise may breach the full protection and security protection if they drastically alter the legal framework for the investments resulting in the destabilizing of the investment. Some BITs may also contain an umbrella clause that guarantees the observance of obligations assumed by the host state vis-à-vis the investor or his investment.

There are many advantages to investor–state arbitration. Successful claimants are typically awarded monetary compensation, which in some cases not only includes the amount invested (plus interest, costs, and expenses) but also lost future profits. Arbitral awards are binding on the parties and create an obligation to comply with them. Most states comply with international arbitration awards voluntarily. In the event a party fails to comply with an award, one of the major advantages of arbitration (as opposed to litigation) is the international enforceability of arbitral awards as compared with foreign court judgments.

It is also worth noting that the European Commission ("EC") has sought to intervene in an increasing number of investor–state claims brought by EU nationals against member states. Indeed, the EC has voiced opposition to intra-EU BITs, i.e., BITs between EU member states, and, recently, went as far as initiating infringement proceedings against Austria, the Netherlands, Romania, Slovakia, and Sweden, requesting them to terminate their intra-EU BITs. 22

In one case, the EC even issued an injunction barring a member state—Romania—from paying the award in the Micula v. Romania ICSID case23 on the ground that such payment would constitute illegal state aid under EU law. 24 That injunction is likely to remain in place until the EC rules on the ultimate compatibility of that aid with the European single market. While the final outcome of the EC's intervention remains hard to predict and would certainly complicate an arbitration, it is by no means a bar to bringing a claim. In 2014, 16 percent of all investor–state arbitrations brought globally were intra-EU in nature, 25 and, in any event, measures such as those taken by the EU are of limited practical concern because most BITs contain termination clauses confirming that their terms will continue in effect for a number of years following termination.

This remains a rapidly evolving and contentious area, although there is little doubt that many investors in the financial sector will be adversely affected by the new conversion bills in Poland and Croatia. Investor–state arbitration is a possible avenue to address these likely losses.


1.Jasmina Kuzmanovic, "Banks Prepare to Sue Croatia Over Swiss Franc Loans Law," Bloomberg Business, Sept. 14, 2015.

2."Croatia Plans to Convert Swiss Franc Loans into Euros," Reuters, Sept. 10, 2015.

3.Jasmina Kuzmanovic, "Banks Prepare to Sue Croatia Over Swiss Franc Loans Law," Bloomberg Business, Sept. 14, 2015. Exchange rate as of Sept. 21, 2015 (1 kuna = US$0.15).



6."Croatia Plans to Convert Swiss Franc Loans into Euros," Reuters, Sept. 10, 2015. According to reports by Bloomberg Business and Reuters, the new changes to the Croatian law became effective on Sept. 30, 2015. See Jasmina Kuzmanovic, "Croatia Bolsters Bank Funds, Aids Kuna before Franc-Loans Switch," Bloomberg Business, Sept. 30, 2015; "Croatia Central Bank Provides Liquidity for Swiss Franc Loan Swap," Reuters, Sept. 30, 2015. As of date of publication of this Commentary, the Croatian authorities had yet to confirm whether this was, in fact, the case.


8.Opinion of the European Central Bank of 18 September 2015 on the conversion of Swiss franc loans (CON/2015/32), at § 1.2.




12."Croatia Plans to Convert Swiss Franc Loans into Euros," Reuters, Sept. 10, 2015.


14.See generally William W. Burke-White, "The Argentine Financial Crisis: State Liability Under BITs and the Legitimacy of the ICSID System," Penn Law: Legal Scholarship Repository, Jan. 24, 2008.

15.See, e.g., CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award, May 12, 2005; LG&E Energy Corp. v. Argentine Republic, ICSID Case No. Arb/02/1, Decision on Liability, Oct. 3, 2006; Enron Corp. Ponderosa Asset, L.P. v. Argentine Republic, ICSID Case No. Arb/01/3, Award, May 22, 2007; Sempra Energy Int'l v. Argentine Republic, ICSID Case No. Arb/02/16, Award, Sept. 28, 2007.

16.See UNCTAD, Investment Policy Hub. Notably, the Croatia–Italy BIT was terminated in 2013. However, Article 13 of the BIT provides that it continues in force for 10 years from the date of termination. In this case, the BIT would remain in force until June 11, 2023.

17.Sylvester Kozak, "Consolidation within the Single European Financial System in 2003-2013," NBP Working Paper No. 166, at 37-38.

18.See Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction, July 11, 1997, ¶¶ 31-37 (applying a broad interpretation to the term "investment" and finding that, under the applicable BIT, loans and other credit facilities constitute covered investments); but see Salini Construttori S.p.A. and Italstrade A.p.A. v. Hashemite Kingdom of Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, Nov. 29, 2004, ¶¶ 52-54 (enumerating a list of characteristics that an investment must possess in order to be considered a covered investment, mainly: "contributions, certain duration of performance of the contract and a participation in the risks of the transaction"); Romak S.A. v. Republic of Uzbekistan, PCA Case No. AA280, Award, Nov. 26, 2009, ¶ 207 (the tribunal agreed with the Salini tribunal and applied a narrow interpretation of the term "investment" even where the definition of "investment" included "claims to money").

19.The FET standard may also be breached by (i) conduct that is not transparent or consistent and creates an unstable or unpredictable legal framework or business environment for the investment; (ii) conduct that violates due process or results in a denial of justice; (iii) discriminatory action; (iv) interference with a contract; (v) bad faith; or (vi) harassment or coercion.

20.See Opinion of the European Central Bank of Sept. 18, 2015 on the conversion of Swiss franc loans (CON/2015/32), at § 3.2.2.

21.See Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Award, July 14, 2006, ¶ 408 (where "protection and security" is qualified by "full," the standard extends beyond physical security).

22.See European Commission Press Release, "Commission asks Member States to terminate their intra-EU bilateral investment treaties," June 18, 2015.

23.Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Final Award, Dec. 11, 2013.

24.See Luke Eric Peterson, "European Commission Enjoins Romania from Paying ICSID Award, Thus Throwing a Wrench into Enforcement of Intra-EU BIT Ruling," IAReporter, Aug. 7, 2014.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.