Borrowers’ appetite for loans in foreign currencies has “primed a bomb” that threatens the economies of central and eastern Europe, according to a story in The Economist this week. A striking chart illustrates the trend; more than half of mortgages in 2008 were denominated in foreign currencies—primarily Swiss francs or euros—in Latvia, Estonia, Hungary, Lithuania and Romania.
As recession puts these countries’ currencies under pressure, borrowers have seen their liabilities explode. A consultant cited in the article reckons that Hungarians who took out foreign-currency loans in 2007 are now paying 70% more than they did (if they pay at all).
Austrian and Swedish banks are particularly exposed to the problems in teetering economies on Europe’s eastern edge. Fearing collateral damage from the foreign-currency mortgage time bomb, access to these types of loans in the future is likely to be severely curtailed, if not outlawed outright. As an Austrian official notes, “we don’t want millions of people acting like little hedge funds.”