Sources of Foreign Currency Debt in European Countries

Abstract

The goal of this paper is to identify the causes behind household and business debt in foreign currency as witnessed in selected European countries over the years 2003–2014. The conducted research provides estimates of a broad spectrum of factors that may increase the scale of foreign currency debt of nonfinancial entities, adding to topical literature. These banking sector factors are specific and include the level of lending margins and loan interest rates, and market determinants, including changes to interest rates, differences in interest rates on domestic and foreign currency, changes in currency exchange rates and macro-economic factors such as the real gross domestic product. Analysis proves that the demand for foreign currency credit is procyclical in nature and is stimulated by the level of the lending margin applied by banks, the volatility of currency exchange rates, and differences in interest rates on the domestic and foreign markets. The paper points out threats stemming from a disproportion in foreign currency debt among non-financial entities.

Keywords

• foreign currency debt
• currency risk
• company
• credit
• banking sector