View of the Day: The threat from emerging Europe

One of the biggest threats to financial stability in the eurozone comes from the region’s exposure to central and eastern European banks, says Peter Attard Montalto, emerging Europe economist at Nomura.

During the boom years, he says, high interest rates in emerging Europe led to a huge increase in foreign currency borrowing by households and companies – most notably in euros and Swiss francs. “Borrowers took the view that the foreign currency risk was low and offset anyway by the credit cost saving.”

But not only did eurozone banks lend to these countries, they also took very large stakes in local institutions. “Indeed, more than 80 per cent of emerging Europe bank assets are owned by western European banks,” Mr Attard Montalto says.