SLOWING GROWTH & A STRONG EURO ARE MAKING BANK LOANS RAPIDLY UNPAYABLE
We see the unresolved & ‘papered’ over banking crisis in the EU raising its head once again. This time it will be with more vengeance!
The catalyst for the crisis is now stemming from the CEE (Central & Eastern Europe). Critically, the forgotten money borrowed by Central and Eastern Europe in Euro’s during the EU ‘good times’ is quickly becoming unpayable.
A recent SNB report warned:
Before the onset of the financial crisis, foreign currency loans to the non-banking sector in Europe became remarkably prevalent. In particular, households and non-financial firms were taking bank loans denominated in lower-yielding foreign currencies and investing in high-yielding domestic currencies (e.g., in the form of home mortgages or business investments), even though these agents did not necessarily have a steady income in the foreign currency concerned. Therefore these retail foreign currency loans were usually dubbed 'small men’s carry trade'. Since the crisis, the outstanding volumes of foreign currency loans to the non-banking sector have been slowly declining in some countries due to macro-prudential measures, deleveraging of banks, and the continued slowdown of European economies. Nevertheless a substantial fraction of households and firms still have foreign currency bank loans.
The chart below shows that as of the second quarter of 2013 the majority of the outstanding loans to the non-banking sector in many non-Eurozone countries continue to be denominated in a foreign currency. For example, in Hungary, Romania, Bulgaria, Croatia, Serbia, and Latvia, between 60% and 88% of the outstanding loans to the non-banking sector are denominated in a foreign currency.
Share of foreign currency loans as a percentage of total loans to the non-banking sector in Europe (2013:Q2)