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Eastern Europe: A Mortgage Crisis As Bad As Ours

3/3/2009

There’s a mortgage crisis brewing in Poland and other Eastern European countries. Here’s what Minyanville, a popular U.S. financial website, has to say:

European banks are at significant risk. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that's in Swiss francs. It's a story that could easily be as big as the US sub-prime problem.

In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it's nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.

But in an echo of teaser-rate sub-primes here in the US, there's a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were 3 times those of the US in terms of GDP, just to give us some perspective. Of course, if you aren't a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you're a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.


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Print Date: 2/28/2020
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