This is a buzzy topic that gets talked about in th niche financial press, but probably hasn’t gotten as much attention as it ought to…
Homeowners across Europe’s periphery are saddled with mortgages denominated in foreign currencies — like the Swiss Franc — and could easily explode in expense as their home currencies fall.
So, for example, Hungarian homeowners are in big trouble if the Forint falls hard against the Swiss Franc, since that sends the cost of mortgages soaring.
At VoxEU, Martin Brown Karolin Kirschenmann Steven Ongena have published a study of 100,000 foreign currency mortgage made at a Bulgarian bank between 2004-2007.
What they’ve found is that banks aggressively pushed these loans:
Looking at the supply of FX loans we find striking evidence that our bank is “pushing” euro loans. Roughly one-third (32%) of all loans extended in euros in our sample and nearly one-quarter of the euro loan volume (23%) are loans that were initially requested in lev. Examining the sub-sample of loans which were requested in lev, we find that the bank is more likely to switch the loan to euros if the firm is of lower observable credit risk. Worryingly though, we also find that the bank is hesitant to offer large and long-term loans in local currency. Further, the bank is more likely to switch a loan to euros after it has received additional customer funding in euros. However, we do not find that the bank pushes FX loans after it has received more wholesale funding in euros. The latter results suggest that while FX lending may be driven by customer funding in FX, the causality between FX lending and wholesale FX funding might go the other way.
The whole thing echoes subprime — you have a cheap method of funding, and banks eager to push those loans over more traditional mortgages.
Here’s the breakdown of FX mortgages in the countries looked at
Anyway, this whole thing has a subprime-ey feel to it in the sense that the story has been around for a while, but nothing’s really blown up yet.
However, if we continue to see the economies of these periphery countries weaken — and their currencies weaken agaisnt the Fran and the euro — then watch out.