The euro-region debt crisis may deepen as eastern European borrowers who took loans in a strengthening Swiss franc struggle to repay western European banks

The euro-region debt crisis may deepen as eastern European borrowers who took loans in a strengthening Swiss franc struggle to repay western European banks, UBS Wealth Management said.
Lenders including Unicredit SpA (UCG), Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI) and Bayerische Landesbank have 80 billion Swiss francs ($101 billion) of household debt in Hungary, Poland and Croatia, emerging-markets analyst Kilian Reber said. Borrowers there face higher payments after the franc gained 9.5 percent against the forint, 14 percent against the zloty and 9 percent against the kuna in the past three months.
“Increased stress on Hungarian and also Polish and Croatian borrowers with Swiss-franc denominated mortgages and consumer loans could send shockwaves through the euro zone,” Reber said yesterday in a phone interview from Zurich. “This is not something that’s on the radar screen of most investors.”
He assigns a 20 percent to 30 percent chance of a stronger franc triggering defaults in eastern Europe and fanning the euro-region debt crisis by forcing western European banks to seek new bailouts.
The franc is this year’s best performing currency, even after the Swiss central bank cut interest rates Aug. 3 and pledged to stem further appreciation. Investors consider the currency a haven as the U.S. economy slows and Europe’s debt crisis pushes toward Italy and Spain.
Franc Loans Rise
Eastern European borrowers sought franc-denominated loans last decade to escape high interest rates in their local currencies. More than 60 percent of Hungary’s household debt is denominated in francs, equivalent to 16 percent of gross domestic product, according to UBS Wealth Management. That figure is about 10 percent in Poland and Croatia, it said.
More than one in ten Swiss-franc loans is non-performing in Hungary, compared with 1.5 percent in Poland and 6 percent in Croatia, according to UBS Wealth Management.
Under the wealth manager’s base case, damage to western European banks will be limited as the Swiss economy slows and the central bank works to halt the franc’s advance. It forecasts the franc, which touched a record high of 272 forint on Aug. 10, will weaken to 210 forint in 12 months.
Western European lenders, which control three quarters of eastern Europe’s banking industry, have scaled back loans to each other as the debt crisis worsens and the global economy slows.
Bank Stocks
Banks deposited 128.7 billion euros ($185.7 billion) overnight with the European Central Bank Aug. 22, more than three times this year’s average, instead of lending the money to other companies. Banks also borrowed 555 million euros from the ECB’s overnight marginal lending facility, up from 90 million euros Aug. 21.
European bank stocks have lost 20 percent as Royal Bank of Scotland Group Plc (RBS) and Societe Generale (GLE) SA declined 43 percent and 39 percent. The cost of insuring European bank debt against default reached a record yesterday, with the Markit iTraxx Financial Index of credit-default swaps linked to senior debt of 25 European banks and insurers rising to 252 basis points, compared with 149 after Lehman Brothers Holdings Inc. collapsed in 2008.