By Mr. Quarter
A couple of posts back, I mentioned the potential economic bomb that lurks in central and eastern Europe. As reported today in the Financial Times, the possibility of a financial collapse there could bring down the Eurozone. Policy errors by the governments in central and eastern European countries contributed to this looming economic explosion and the most egregious was that they encouraged households to obtain mortgages in foreign currencies.
In Hungary, for example, almost every mortgage is a foreign currency mortgage, mostly denominated in Swiss francs because of cheap Swiss interest rates. Net effect? Hungarian homeowners get farther and farther behind as the Hungarian forint falls against the rising Swiss franc.
So how could this bring about the collapse of the the "Eurozone?" The central and eastern Europeans made sure their banks were owned by foreigners, and in particular, Austrian, Italian and Swedish banks own a large chunk. The Financial Times reports that the exposure of Austrian banks to eastern Europe mortgage debt is about 80 per cent of Austria’s gross domestic product. If Hungarian households default, it is not Hungary that will go down, but Austria, and/or Italy and Sweden - a systemic event.