Forex Loans Embed an Exchange Rate Risk: The Situation of Foreign Loans

Loans and mortgages in Foreignbecame famous Cyprus after 2006, the entire year once the Republic would be a candidate country to evaluate the EURO zone. In this particular period, Foreignloans were attractive because the price of borrowing was relatively low. Particularly, inside the period 2006-2009, a large number of investors required loans in SWISS FRANC. Nonetheless, the sudden appreciation of Foreigntowards EURO worsened the positioning of individuals investors and caused outstanding losses to borrowers and financial institutions.

Financial and financial institutions should shape their decisions and actions by considering the exchange rate fluctuations. Aside from risk assessment, banks are needed to tell customers and investors adequately concerning the risks they might face after they made the decision to take credit inside a forex. Banking and banking institutions are needed to think about customers’ capability to comprehend and cope with risks associated with exchange rate fluctuations. Additionally for this, banks are obliged to warn the shoppers about potential risks that could emerge. In other words, the financial institutions should have a transparent approach towards forex loans and supply an in depth information for their customers.

As pointed out above, borrowing in forex is dangerous due to exchange rate fluctuations which in turn causes fluctuations within the capital itself the customer are obligated to pay. Since borrowing in forex embeds a substantial risk Cyprus financial institutions have initially distanced from these types of loans. Nevertheless, Cyprus banking and banking institutions haven’t believed the complex nature of forex loans and based their actions around the available information they’d in a particular period.

The sudden appreciation of Foreigntowards EURO elevated the price of borrowing. Consequently, it produced problems concerning the repayment of Foreignloans. The second caused considerable losses for financial institutions and consumers. Around the one hands, the restructuring of non-performing loans gets to be more challenging. However, consumers encounter serious difficulties to repay their loans.

In October 2015, rating agency MOODY’S cautioned the forced conversion of Foreignloans and mortgages would cost the financial institutions €250 million and can create ‘moral hazard’. New Cyprus Central Bank’s data show non-performing loans continue to be growing in banks’ balance sheets. Presently, you will find proceedings against Cyprus banking and banking institutions that promoted Foreignloans but haven’t informed and guarded borrowers from the chance of exchange rate hit.

ForeignLOAN Proceedings

Nearly all Foreignloans were granted through the Bank of Cyprus and Alpha Bank. Elena Gregoriades, an agent from the Central Bank of Cyprus, maintained that based on Central Bank’s data, the entire Foreignloans granted for purchasing property are believed to €1.05 billion and affected 3000 accounts. Mrs Gregoriades articulated that the consumer who lent in Foreignin the time 2008-2010 endured a loss of revenue of 30%-40% in the current exchange rate.

Roughly 11.000 borrowers happen to be impacted by the inflation of the loans because of Foreignappreciation towards EURO. Presently, the exchange rate between EURO and Foreignis 1/1.1. However, the majority of the consumers lent once the exchange rate EURO/Foreignwas greater than 1.6. The augmentation of repayment cost and losses are highly connected using the transparency of Cyprus financial institutions in regards to the high-quality details about the embedded risks.

It ought to be noticed that the ecu Court rules towards the borrowers regarding cases associated with foreign currency loans. A legal court cases highlight that European consumers and investors are safe against unclear selling practices by which financial institutions were engaged. Quite simply, the legislation protects consumers from misinformation and improves the transparency of banking and banking institutions.

Lately, a historic court decision in Athens judged the loans in Foreignas non-valid and requested banks to pay for the entire extent from the damage the result of a forex hit. Particularly, the borrowed funds agreement between your borrowers and also the Millennium Bank was judged as invalid. Furthermore, a legal court judged the borrowers were unable measure the risks associated with forex loans therefore the bank must have provided the required information and support. The choice from the court purchased the borrowers to repay Foreignloans in the exchange rate that applied once the loan was granted and never in the current exchange rate.

The billion euro damage and also the regulatory framework advised borrowers to submit lawsuits against certain Cyprus financial and financial institutions. Several Cypriot borrowers or foreign residents from the Republic of Cyprus go to legal actions against financial and financial institutions in Cyprus that promoted Foreignloans with no information you need in regards to the risks they might face.


Following a ongoing developments, banking and banking institutions are elaborating new and improved plans for that regulation and repayment of Foreignloans. An agent from the Central Bank of Cyprus stated that banks decided to submit revised plans, with the rate of interest difference, the advantage of the customer, the quantity lent and also the date from the loan agreement. Additionally, banks ought to provide borrowers with higher repayment plans minimizing rate of interest. However, it ought to be underlined the Central Bank of Cyprus cannot go to further actions since the process of systemic banks require the approval from the European Central Bank.


The Limitation Law 66 (1) 2012 sets deadlines which the main one party should bring claims or give notice of the claim to another party. Once the limitation period expires, a celebration is illegitimate from initiating claims against another party. What the law states provisions consider different limitation periods based on the nature from the actionable right.

Since Limitation Law 66 (1) 2012 expires on 31st December 2015, this means that borrowers who would like to bring claims against financial institutions inside the six-year limitation period, don’t have sufficient time. Quite simply, borrowers who would like to bring claims against financial institutions will need to proceed using the necessary procedures by 31st December 2015, unless of course the Cyprus government proceeds to help extension.

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