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The latest report on financial stability from the Hungarian central bank features some arresting statistics on foreign-currency lending in the country. Hungarian households’ enthusiasm for Swiss franc-denominated loans played a major role in deepening the country’s recession, as a retreat from risky assets punished currencies like the forint and bolstered safe havens like the franc.

New foreign-currency loans in Hungary have slowed markedly in recent months, with borrowers favouring forints. Still, franc, yen and euro-denominated loans comprise some 70% of outstanding loans.

Even if all foreign-currency lending stopped from today, the outstanding stock of these loans would fall by only around 13% by the end of 2011, according to the central bank. With such a large share of the population exposed to foreign-exchange risk, “the vulnerability of the financial system is decreasing only gradually,” the bank laments.

CEE mortgagesBorrowers’ 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.”

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