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Inefficient Debt Relief: Evidence from a Foreign Currency Loan Repayment Program

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  • Lóránth, Gyöngyi
  • Oláh, Zsolt
  • Schindele, Ibolya

Abstract

We study a large-scale debt-relief intervention implemented through Hungary’s 2011 Early Repayment Scheme, which allowed repayment of foreign-currency mortgages at a fixed, below-market exchange rate. High FX-exposure banks reduced household lending by 19%, while their corporate lending remained stagnant, whereas low-exposure banks expanded lending by 40%. Loan-level evidence suggests a strong tightening of supply: approval rates at high-exposure banks declined by 17–22 percentage points, and by an even larger 26–32 points for low-income applicants, with no corresponding change at low-exposure peers. Prepayment patterns display strong selection: wealthier households were more likely to repay, while heavily indebted borrowers were less likely to do so. These findings suggest that unfunded debt relief can exacerbate inequality in both participation and access to credit.

Suggested Citation

  • Lóránth, Gyöngyi & Oláh, Zsolt & Schindele, Ibolya, 2025. "Inefficient Debt Relief: Evidence from a Foreign Currency Loan Repayment Program," CEPR Discussion Papers 20961, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20961
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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