"European banks are five times more exposed to emerging markets than American and Japanese banks,"

"European banks are five times more exposed to emerging markets than American and Japanese banks," said Stephen Jen of Morgan Stanley. "Pressures on emerging market economies therefore could have a particularly negative boomerang effect on European banks." Concerns have suddenly shifted from liquidity and bad balance sheets to exposure to economies like Bulgaria, Latvia and Romania, where currencies are declining and economies faltering. In the last week, Eastern European currencies have slid by around 10.0%. The central banks of Hungary and Denmark have sought to prop up their currencies by raising interest rates, but the sell-off of emerging market currencies continued on into Friday. (See "Flight To Dollar And Yen.")
"Currency is what people are focusing on now because it can exacerbate the problem of nonperforming loans," said Pedro Fonseca, a senior analyst at Keefe, Bruyette & Woods. If, for example, a Polish borrower's mortgage is in Swiss francs, but they are earning Polish zloty, then they are more likely to default on the payments of their house if the zloty depreciates. Many European banks will now pull back on making these so-called FX loans, which are linked to low-yielding currencies like the Swiss franc. Such lending is popular among the Western European banks that dominate Eastern Europe, making up 52.0% of all lending in Hungary and 54.0% in Romania.

Posted in: Eastern European currencies have slid by around 10.0%. The central banks of Hungary and Denmark have sought to prop up their currencies by raising interest rates