Fate Denominated in Foreign Currency: Impacts of “Foreign Currency (FX) Loans” on the Systems of Social Welfare and Social Inequalities in Europe

The so called foreign currency (FX) denominated borrowing is now at least 40 years old. This special financial product has been continuously “improved” during its decades-long history of development. In the 1980s, this kind of special financial product offered by banks appeared first in Southeast Asian countries (as loans in dollars), then in Australia and New Zealand, and later on in Central and South America, China, and even in Nigeria. Soon after the spread of this “special” financial product in Australia and New Zealand, the first problems arose. Sooner or later, most borrowings defaulted, borrowers and their businesses went bankrupt, their family lives were largely ruined, their later lives became almost impossible—and the first unequivocally clear judicial judgment was also handed down. Later, these “innovative” financial products have been used in many Western European countries and in most of the postcommunist Central and Eastern European countries with emerging market economies (EMEs). Once the dangers of this type of “innovative” but highly “toxic” financial banking product were realized in the advanced democracies of Western Europe, mostly in the Euro-area countries of the European Union (EU), quick and serious efforts were made to prevent its widespread use, to make its availability subject to strict conditions, and to closely control the banks and other financial institutions which tried to offer this financial product. At the same time, hundreds of thousands of customers with relatively low level of financial literacy in postcommunist Central and Eastern European countries, who believed the misleading communications of the banks and trusted in the effectiveness of the state bank supervision and state-controlled national consumer protection systems, took these financial products to buy their homes and consumer durable goods and became trapped in a nightmare. As a result, these special banking products caused very serious socioeconomic challenges in each affected postcommunist national economy and society and had a negative effect on the systems of social welfare and social inequalities. The “product” has been continuously “improved” during its decades of development, until it arrived in Hungary through the Austrian banks that dominated the local banking sector, where there has been a more devastating effect than anywhere ever before. The entire economy and society still suffer from them, and the unsolved problems related to the FX-denominated borrowings has the potential to be a source of severe future social and political conflicts.