Thursday, July 06, 2006

ECB Warns Against Foreign Currency Borrowing

Source: FT

An ECB taskforce fears that a sudden downswing in currencies of some nations could lead to a series of bankruptcies. Although no deprecation is anticipated, the warning was issued because of the widespread borrowing by individuals and businesses in foreign currencies. Low interest rates have made it attractive for these borrowers to take on large loans.

The report points to a similar situation that led to the Asian financial crisis of 1997-1998.

It comes at a time when borrowing is high and emerging markets have suffered a series of financial difficulties. In addition to Bulgaria and Romania, the report addressed Croatia and Turkey.

The report noted that, “Experience shows that a substantial proportion of credit booms end in a banking crisis.” It also looked down on foreign-owned banks, stating that their “presence may have also contributed to the very fast rates of credit growth, as foreign-owned banks compete for market share.”

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