The Scenario Of A Mortgage Crisis In An Eastern European Country

With the growing resonance of American subprime crisis, the issue of a comparable scenario is of interest for countries that have recently seen an upsurge in home prices and a fast expansion of primary mortgage market. This paper is focused on the case of Romania, one of the newest EU members, that has experienced both aforementioned symptoms. Unlike in America, the primary mortgage market is undersized and debtors' selection criteria are reasonably enforced in Romania. The main danger emerges from the huge popularity of loans denominated in foreign currencies. Many debtors are more or less consciously exposed to a significant exchange rate risk. Given a very large current account deficit and the turbulences from global credit markets, the scenario of a substantial depreciation of Romanian currency, that in turn could trigger a wave of mortgage defaults, appears plausible.