The Subprime of Europe May Be About to Blow

[Tauvros]

Joe Weisenthal, Business Insider · Monday, Sept. 13, 2010

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.

http://www.financialpost.com/news/business-insider/subprime+Europe+about+blow/3518398/story.html

 

[morganist]

Something I suspected for a long time. I don't know what will happen if it happens. I was at a dinner with a gov minister (British) who is certain there will be no second dip. I disagree with him. I think it is just wishful thinking.

 

[nutmeg]

Quote from morganist:

I was at a dinner with a gov minister (British) who is certain there will be no second dip.

How ya doing Morgan, haven't seen you around for a while. What did you and the gov minister have for dinner?

 

[S2007S]

I have never heard so much worthless dribble about the possibility of a second dip recession when the damn economy didn't even get out of the first recession. WERE still in the same recession as the original one, you know the one that happened around the time of the lehman collapse.

 

[trefoil]

Well, in many ways Europe is far more insolvent than the US. But you can wait a long time for these things to blow, or they can blow tomorrow.
Overall, the euro is doomed, but it's going to take more than what this crisis has dealt out to kill it. Mortgage holders on the periphery are like small countries that keep the big countries awake at night (and from the stuff presented here, a lot of what we're talking about is coming from those same small countries): you have to keep one good eye on them, but mostly their crises mean precisely nothing. Only when some fool like the guy who offed the Duke of Sarajevo in 1914 comes crawling out from some nameless rock does what happens in the small and insignificant places suddenly become significant.
Absent that, lots of smoke, not a lot of heat.