Retail credit expansion and external finance in Hungary: lessons from the recent past (1998–2007)

Rapid credit growth is a concern in many European countries. In recent years, credit to the private sector has been growing very rapidly from a very low initial level in a number of central, eastern and southeastern European countries. This credit expansion has been largely a result of increased mortgage loans to households, denominated in foreign currency in some countries. On the one hand, rapid credit growth can be justified by the very low initial level of intermediation and the convergence towards levels observed in developed EU countries. On the other, both empirical and theoretical arguments imply that too rapid credit growth, or a credit boom, can have serious macroeconomic consequences, especially if accompanied by sizeable external imbalances, which can also be observed in the region. Undoubtedly, the risk of having excess credit expansion mainly denominated in foreign currency has become a key issue for policy discussion.