Practical analysis for investment professionals
14 December 2011

The Potential European Debt Crisis You Are Not Hearing About

Posted In: Economics

The European sovereign debt crisis has been occupying a disproportionate amount of investor mindshare over these past many months. Yet there is another potential debt crisis in Europe that is receiving almost no attention from financial analysts or the press.

During the global real estate bubble €6,123 billion worth of mortgages were issued in Europe. Many of these borrowers are paid salaries or wages in their local currency yet must repay their loans in euro. Mortgages taken on by homeowners in the European Union (EU) who live outside the eurozone are known as “FX mortgages.” The declining value of the euro has thus proved a boon to FX mortgage holders who saw their property values fall when the bubble burst — but, if the euro regains its value, European banks could face a sea of defaults.

Why FX Mortgages Are A Potential Problem

As a condition of joining the EU, a nation is obligated to eventually adopt the euro as its currency. EU members that have adopted the euro are collectively known as the eurozone. Of the 27 EU nations, 10 currently do not use the euro. Of these ten non-euro nations, three nations (Denmark, Sweden, and the United Kingdom) have been exempted from ever having to adopt the euro.

Of the remaining non-eurozone countries, two of them, Latvia and Lithuania, have pegged their currencies to the euro. So, in effect, Latvia and Lithuania are de facto members of the eurozone.

The remaining five nations (Bulgaria, the Czech Republic, Hungary, Poland, and Romania) are all members of the EU but not yet members of the eurozone. Borrowers in these nations had difficulty getting home loans in their local currencies during the global real estate bubble. Consequently many homeowners in these five nations entered into mortgages denominated in either euro or in Swiss francs — the aforementioned foreign exchange (FX) mortgages.

Unfortunately, when the euro and the Swiss franc appreciate, borrowing costs for consumers in each of the five non-eurozone nations also rises. It puts borrowers at a distinct disadvantage as they are earning paychecks in a currency that is depreciating relative to the currency used to pay their largest monthly expense. Effectively, these borrowers have adjustable rate mortgages — but with interest payments that adjust on a daily basis as currencies fluctuate in value.

The Size of the Potential FX Mortgage Crisis

Total FX mortgages in the five non-eurozone nations as of the end of 2009 were €32.5 billion, according to the European Mortgage Federation. (Note: Unfortunately more current data are not available.) This compares to total 2009 GDP in the five nations of €691.5 billion, according to figures from the International Monetary Fund and CFA Institute. So FX mortgages are 4.7% of the economy in these five nations. Additionally, the €32.5 billion of FX mortgages represented 0.28% of the total EU-wide economy in 2009.

While these figures may seem insignificant, consider the fact that the EU is, at the time of this writing, teetering on the brink of recession. Consequently, a loss of 0.28% of GDP would be significant and could further threaten the capital ratios and solvency of European banks.

Here is an overview of each of the five nations’ exposures:

2009 GDP (in Millions) % of EU GDP Total Value of Mortgages (in Millions) % of EU GDP FX Mortgages % of EU GDP
Bulgaria €33,818 0.29% €4,268 0.04% €2,281 0.02%
Czech Repub. €139,883 1.19% €16,975 0.14% €1,379 0.01%
Hungary €92,912 0.79% €15,543 0.13% €11,367 0.10%
Poland €308,873 2.62% €56,569 0.48% €14,496 0.12%
Romania €115,969 0.98% €5,700 0.05% €2,960 0.03%
Total 0.84% €32,482 0.28%


Risk of FX Mortgage Defaults is Increasing

Each percentage point of depreciation in local currencies results in a percentage point increase in a monthly mortgage payment. Doubtless the many borrowers in the five non-eurozone nations are tracking currency fluctuations with great interest.

As a way of measuring the risks inherent in FX mortgages it is helpful to look at the volatility in exchange rates between the local currencies of the five non-eurozone nations and both the euro and Swiss franc.

As of 16 September, 2011 here are the volatilities of the five non-eurozone nations’ currencies on a rolling monthly basis:

Relative to the € Relative to the Swiss Franc
Rolling 30-day FX σ for Qtr. Rolling Monthly FX σ for Yr. Rolling Monthly FX σ for 5 Yrs. Rolling 30-day FX σ for Qtr. Rolling Monthly FX σ for Yr. Rolling Monthly FX σ for 5 Yrs.
Bulgaria 0.35% 0.11% 0.12% 6.76% 2.82% 1.83%
Czech Repub. 0.70% 1.18% 1.65% 6.43% 3.35% 2.61%
Hungary 1.92% 1.72% 2.42% 7.14% 3.57% 3.23%
Poland 1.48% 1.43% 2.26% 6.23% 3.25% 3.16%
Romania 0.59% 0.90% 1.72% 7.05% 3.18% 2.71%


Sources: OANDA and CFA Institute. Note: Monthly periods were utilized because mortgagees pay on a monthly basis. Rolling periods were chosen to help smooth data from volatile currency markets.

Clearly those unfortunate borrowers who have mortgages denominated in Swiss francs are having a harder go of it than those whose mortgages are denominated in euros. Not only have each of the five nations experienced dramatically increasing volatility between their home currencies and the Swiss franc, the magnitude of the volatility is a full 5.714% higher for the franc over the euro.

By comparison the volatility in the euro exchange rates has actually decreased in both the Czech Republic and Romania in the last year, and over the past five years only Bulgaria’s exchange rate with the euro has experienced higher volatility.


So if the EU manages to solve its sovereign debt crisis it is likely that the euro will recapture some of the value it has lost in 2011. In rising, the euro may increase the borrowing costs in the five non-eurozone nations with big FX mortgages, thus increasing mortgage delinquencies.

Though the potential FX mortgage crisis in Europe is dwarfed by the sovereign debt crisis, it still has the possibility of sending Europe into a recession. Furthermore, as a potential crisis receiving very little attention its impact could be disproportionate.

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

14 thoughts on “The Potential European Debt Crisis You Are Not Hearing About”

  1. Denis Manzi says:

    Mr. Voss, i read the article with a lot of interest and i want to congratulate with you. Very good analysis.

    Denis Manzi

  2. Hello Denis,

    Thank you for your kind comments! I’m glad that you appreciated the piece.

    With smiles!


  3. provia says:

    big up you’re my inspiration, i had been reading most articles that had been posted by de cfa institute and since then i had acquired a greater knowledge in regard of the economic world at large.

  4. Hi Provia,

    Thank you for the kind words…much appreciated. Stay tuned to The Enterprising Investor as my colleagues are also doing great work and creating “must read” content, too.

    With smiles!


  5. rafi says:

    Great article, but I am a bit confused. Is it not advantageous for non-euro zone countries right now since the Euro is weaker than their local currency? Or am I missing something.

  6. Hello Rafi,

    Re-read the article carefully and you will see that these mortgages are denominated, not just in euro, but also Swiss francs. In fact, it is widely believed that well more than half are denominated in Swiss francs. Unfortunately, penetrating data that would allow greater insight do not exist.

    Separately, if the Europeans solve their debt crisis it is likely that the Euro would strongly appreciate sending the EU periphery mortgagees into a difficult situation. In other words, solving the crisis will likely result in economic headwinds in the form of mortgage default risk. Normally this would not be a large problem, but in the context of the EU on the brink of recession already, it may serve as a catalyst for a recession.

    With smiles!

    Jason A. Voss, CFA

  7. Rahul gupta says:

    Your writing style and understanding of subject is too good. This article enlighted me with more on foreign currency exchange mortgage crisis in Europe.

  8. Hello Rahul,

    Your kind words are welcomed…thank you. I am pleased that it helped you to understand more of the risks inherent in the European sovereign debt crisis.

    With smiles!

    Jason A. Voss, CFA

  9. Randy Gonzalez says:

    Thank you for such a great article!, I was searching for an article to present in school and i think that this is just great!, Thanks Again.

    And please don’t reply with smiles lol, kidding hahaah

  10. Belyan says:

    Mr. Voss,
    I was extremely suprsised to find fluctuations between Bulgarian Local Currency (BGN) and Euro in your analysis as in Bulgaria local currency has been fixed (pegged) to the Euro (previously Deutsche Mark) since 1997 and this was regulated by law.
    Otherwise I appreciate your analysis and the interesting topic chosen.

    1. Hello Belyan,

      Thank you very much for your comment. My apologies for not having gotten this right. In my research of each of the various currencies, I never came across information stating that the Lev was pegged to the Euro. In fact, the data quoted in the article comes from Oanda – as referenced in the article itself – and that organization is still reporting daily fluctuations between the Euro and the New Bulgarian Lev. It sounds as if the Lev trades within a range. Is that correct?

      All of this is a perfect demonstration of something easy to forget in the modern information era: information discover is not yet entirely perfect. Thank you for your part in making it more perfect!

      With smiles,


  11. Belyan says:

    Hello Mr. Voss,

    I really do not know where and how Oanda gets its financial information, but Bulgarian Lev has been pegged at a fixed exchange rate 1.95583 leva (levs) for one euro since 1999. Probably they (Oanda) report some fluctuations of bid/ask spreads, but this is a guess.

    Hope this helps.

    With regards,

    Belyan Belchev, CFA, ACCA

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