We examine the real economic consequences of a sudden increase in household
debt burdens by exploiting spatial variation in exposure to household
foreign currency debt during Hungary’s late-2008 currency crisis. The
revaluation of debt burdens leads to higher default rates and a collapse
in spending. These responses translate into a worse local recession and
depressed house prices. A 10 point increase in debt-to-income raises the
unemployment rate by 0.6 percentage points, driven by employment losses
at non-exporting rms. Consistent with demand externalities of debt –
nancing, regional foreign currency debt has negative spillovers on nearby
borrowers without foreign currency debt.