My breakfast companion looked gloomy.
He’d flown into Washington from Vienna the day before. When he deplaned, he found a shocking email waiting for him: a demand from his banker for immediate payment of €12,000. Although a resident of Austria, he had taken a home mortgage in Swiss francs, which carried a lower interest rate than mortgages in euros. But 48 hours before he had arrived in the United States, the Swiss franc had surged by 20 percent against the euro. That currency appreciation had wiped out his equity in the house. His frightened banker wanted a new infusion of cash to replace the vanished equity.
In the second half of January, hundreds of thousands of homeowners across Europe—and especially across Central and Eastern Europe—have been jolted in similar ways. Their distress is contributing to a political and financial crisis in a region already shadowed by economic anxiety and Russian aggression.
First, some background: In small European countries, especially those that don’t use the euro, local banking markets are not very competitive and often dominated by foreign banks. These foreign banks, which typically borrow in euros, worry about the risk of lending in the local currency. If that currency depreciates, the lending bank could suffer severe losses. Bankers being bankers, they look instead for ways to offload that currency risk onto their customers.