In view of the issue of developments in the exchange rate of the kuna against the euro and the Swiss franc that has been raised again recently, and the queries put forward to the Croatian National Bank in this regard, we wish to explain once again the position of the Croatian central bank on this issue, as we have done on several occasions in the past.

Firstly, the euro is by far the most significant currency for the Croatian economy. Given the high level of euroisation and large dependence of the Croatian economy on imports, the maintenance of the stability of the exchange rate of the kuna against the euro (HRK/EUR) is essential both for the maintenance of price stability and the stability of the domestic banking system. Therefore, the exchange rate of the euro serves as an important anchor in the pursuit of monetary and exchange rate policies of the Croatian National Bank, which include occasional interventions of the central bank in the foreign exchange market.

The exchange rate of the kuna against the euro on the CNB's exchange rate list is calculated on the basis of the previous day's foreign currency purchase and sale transactions on the Croatian foreign exchange market and is therefore not the result of an arbitrary decision of the central bank, but a result of actual purchase and sale transactions. Only in case of excessive and sudden fluctuation in this price (that could send wrong signals to the market and prompt undesired speculation), does the central bank intervene in the foreign exchange market by purchasing or selling foreign exchange or, not less importantly, by using instruments that can impact kuna liquidity.

Presently, there are no fundamental reasons for depreciation pressures, given that the current account deficit is low and the inflow of foreign currency from tourist services exports is high. It is probable that frequent media coverage regarding the exchange rate policy has brought to the surface in the domestic and international context speculation on the central bank's position regarding the adequacy of the exchange rate policy and has thus driven the behaviour of some of the participants in the foreign exchange market, including some banks. This is why we want to stress once again, as we have done before, that the monetary and exchange rate policies will remain exactly as they were which is exactly the type of policies that, in the given circumstances, can ensure price and financial system stability. To achieve this objective, the CNB will use not only its instrument of foreign exchange interventions but also other instruments available to it that enable the central bank to keep in check the kuna liquidity. It is necessary for market makers in the foreign exchange market to view their own interests as well as broader interests of the economy in which they operate and on which they depend against such a background.

Secondly, the value of the kuna against other foreign currencies on the exchange rate list of the Croatian National Bank, the Swiss franc included, is calculated on the basis of the relationship of the euro against these currencies on the global foreign exchange markets, which is evidently outside the scope of influence of the Croatian National Bank. The exchange rate of the Swiss franc against other major global currencies falls within the sphere of responsibility of the Swiss central bank. However, pressures generated by the global financial crisis (increased demand for the Swiss currency) were so strong that this bank's efforts to control sudden and steady strengthening of the franc produced only limited results (after, as suggested by available data, the bank accumulated over EUR 240bn in its international reserves and generated almost CHF 20bn in losses on exchange rate differences last year). Future developments in the exchange rate of the Swiss franc will depend on global economic conditions, most notably at this moment the issue of the US debt and the crisis in some of the eurozone countries.
Clearly, the value of the Swiss franc on the CNB exchange rate list is not the result of the exchange rate policy of the Croatian central bank but a reflection of global cross-currency relationships.

However, aware of the risks of borrowing indexed to foreign currencies whose developments on the global markets are outside the scope of influence of the Croatian National Bank and which, unlike the euro, are not crucial to the pursuit of the domestic exchange rate policy, the Croatian National Bank was the first to warn on several occasions (through postings on its website and statements given to the media by its chief officials) of an increased risk of loans indexed to the Swiss franc. The CNB advised the citizens not to assess the cost-effectiveness of their prospective loans only on the basis of the (current) interest rate but to take into account also the risk of change in the exchange rate of the Swiss franc (stressing along the way the priority of maintaining the stability of the exchange rate of the kuna against the euro).

Thirdly, as regards the foreign currency clause, Croatia is characterised by a high level of currency substitution (replacement of the domestic currency by a foreign currency) which can best be measured by a share of foreign currency deposits in total banking system deposits. Presently, this share amounts to approximately 80%, with the euro dominating in terms of the currency structure of these deposits. Prior to the introduction of the euro, it was the German mark that dominated, which suggests that currency substitution practice is not new to Croatia (at the time when Croatia gained independence, deposits in German marks accounted for over 90% of total deposits). As foreign currency deposits account for the bulk of banks' sources of funds, the banks also grant loans in foreign currency or, in most cases, loans in kuna indexed to a foreign currency. Under the law and the principles of risk management, the banks are obligated to take account of the exchange rate risk, i.e. guard the value of their liabilities through time. Were it not so and were it not for the obligation of banks to maintain a matched currency structure of their assets and liabilities (loans granted and deposits received), any exchange rate changes might threaten banking system stability and lead to problems in meeting the obligations of banks towards their predominantly euro depositors.

And finally, it should be noted that the Croatian National Bank is not an institution that decides on the introduction or revocation of individual legislative provisions governed by the Civil Obligations Act. But it is an institution whose legislative tasks include among others the task of maintaining financial system stability. It is evident that the central bank, in assessing the possible effects of individual proposals, has to weigh the impact of any possible consequences for the stability of this system and the overall economy that may ensue from such proposals.