Consequences of Debt Relief: Evidence from a Foreign Currency Loan Repayment Program

We study a large-scale debt-relief intervention implemented through Hungary’s 2011 Early Repayment Scheme, which allowed repayment of foreign-currency mortgages at a fixed, below-market exchange rate. High FX-exposure banks reduced household lending significantly relative to low-exposure banks, with differential declines of 16–22% depending on the measure of FX exposure. The contraction extended to corporate lending, indicating spillovers beyond the directly affected mortgage market. Loan-level evidence points to a substantial tightening of credit supply: approval rates at high-exposure banks declined by 19–23 percentage points relative to low-exposure banks, with substantially larger declines of 28–34 percentage points among lower-income applicants. Prepayment patterns display strong selection: wealthier households were more likely to repay, while heavily indebted borrowers were less likely to do so. These findings suggest that unfunded debt relief can exacerbate inequality in both participation and access to credit.