Friday, June 19, 2009
A cautionary tale about mixing mortgages with currency risk
One of the key reasons for the decline in the UK economy is the correction currently going on in the housing and commercial property markets. Britain, like a number of other countries, borrowed hundreds, if not trillions, of dollars and euros to bid up the prices of assets that already existed. However in the main, the foreign exchange borrowing was done at an institutional level. This was not always the case in eastern and central Europe. For instance, in March 2007 Linda Pasztor bought a flat in Budapest (FT, 21 March 2007). She needed a mortgage for the equivalent of $71,500. Did she borrow Hungarian forint at 5.5%? No â€“ she went to the Austrian Erste Bank and borrowed 87,000 Swiss francs at 4%.