Rapid borrowing by households and businesses in aspiring European Union member countries, especially in foreign currencies, may make the region more vulnerable to financial crises, a central bank taskforce found.
A report published this week by the European Central Bank said private borrowing in Romania, Bulgaria, Croatia and Turkey had increased rapidly in recent years, posing a risk to banks as well as to wider financial stability.
The report also looked at the economic challenges facing the EU applicants, pointing to rising inflation, current account deficits, and limited success fighting money laundering.
Emerging markets in eastern Europe have been hard hit in the last two months by investors reconsidering the risks of putting money into assets in such countries, including Turkey where the currency fell 25 percent between the end of April and late June.
The taskforce, made up of representatives from the ECB and central banks from EU and accession countries, said borrowing in foreign currencies, partly driven by cheap interest rates, exposed both borrowers and lenders to currency market risk.
"Extensive foreign currency transactions can have implications for financial stability as they can give rise to significant currency mismatches, whereby the income or net worth of an economic entity is exposed to changes in the exchange rate," the report said.