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Austrian Banks, East European Subprime, and Hungarian Consumer Bankruptcy

posted by Jason Kilborn

Change the names, and you don't even have to read the rest of the story any more. Europe and the United States are on parallel tracks to hell in a handbasket. Today's Washington Post has a fascinating story on the woes of Austrian bankers, whose drive to conquer emerging East European credit markets is now coming back to haunt them. Substitute Wells Fargo and Citigroup for Erste Bank and Raiffeisen Bank, and mention California, Nevada, and Florida instead of Hungary, Romania, and Ukraine, and any U.S. reader of popular news can see what's coming. Austrian banks for years ignored warning signs that these fast-growing markets were overheating, and the banks expanded faster than regulators could keep up--sound familiar? The big problem in Eastern Europe was banks would lend Euros or Swiss Francs to, say, Hungarians, at lower interest rates than similar loans denominated in local currency (e.g., Hungarian forints). While it's probably overkill to call these "subprime" loans (and the borrowers were generally creditworthy), these loans were subject to a different but still substantial risk; i.e., a potential upside-down position for borrowers if currency markets shifted, which is exactly what happened a few months ago. Imagine earning your pay in Russian rubles but having to repay in U.S. dollars, especially after the exchange rate of the former heads south.  Not good.

At least for the consumer borrowers on the business end of these nasty loans, a potential white knight might have just appeared on the horizon. The Hungarian Ministry of Justice has been working for months on a proposal for its first consumer bankruptcy (debt adjustment) law. The government reviewed the proposal and recently announced that it was moving forward with it (disclaimer:  I don't read Hungarian, so I know about this only because I advised on the development of this proposal). As expected, this idea faces stiff opposition from the banking sector, who insists that this time of financial crisis is the wrong time for a radical new proposal like this--which strikes me as exactly backwards! U.S. bankruptcy law developed during a series of crises in the 19th century, and our Chapter XIII (now 13) developed during the Great Depression (anyone remember the Chandler Act of 1938?). Getting consumers back on their feet will be key to the recovery of Eastern Europe (and the U.S., for that matter), so I'm heartened by the move by the Hungarian government to offer debtors the "fresh start" that they need. Wish them luck!

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