engleski

The end of illusive prosperity: Asset inflation, household debt and new vulnerabilities in Eastern Europe

In the pre-crisis period various features of financial deepening have been observed across the region. In the context of open capital flows, the export-led growth model to which many of the post- socialist countries subscribed was inevitably transformed into consumption-led growth model underpinned by massive capital inflows. The high share of foreign ownership of the banking sector enabled the domestic banks to rely heavily on the foreign sources of financing. As the cross-border loans grew in size and importance, a vicious cycle of asset price inflation, mortgage credit expansion and rising household debt emerged. Throughout this period lending in foreign currency became a common strategy for the banking sector in Eastern Europe. This feature became increasingly important since 2008-9 when the effects of a currency mismatch came to the fore, imposing additional pressure on the households whose inability to hedge against, or even apprehend the risks involved was exploited in the quest for market share and high profit margins. This paper focuses on the driving forces behind the foreign currency lending in Eastern Europe and the contradictory interaction between banking practices and household behavior in the post- socialist context. Against the backdrop of the deep recession, the appreciation of the Swiss franc gave rise to a post-socialist variety of subprime borrower and accentuated the political nature of indebtedness in transitional capitalist societies. The case of foreign currency mortgage loans denominated in Swiss francs will be examined in detail on the basis of quantitative and qualitative data for Croatia and Serbia.

post-socialist countries; banking sector; asset price inflation; household debt; housing loans; CHF loans

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