If you were a bank, would you do that?

The financial markets of Central and Eastern European countries have manufactured a credit bubble of their own design: consumer loans denominated in foreign currency. What this means is that banks operating in, say, Hungary, have been loaning money to Hungarians; but instead of forints, they have been denominating the loans in non-Hungarian currencies (mostly euros and Swiss francs). Those loans became hugely popular for several reasons. First, those countries have had a large demand for credit but relatively small stocks of domestic capital. Second, foreign currency loans were cheaper to borrowers than loans in their native currencies, because local currencies had higher inflation rates as well as interest rates. In addition, some of those native currencies (such as the Polish zloty) have been slowly but constantly gaining value against the euro, which made euro loans get even cheaper over time.

But, of course, this has a flip side: if your home currency suddenly loses value against the currency that your loan is denominated in, your payments suddenly increase. This is exactly what happened when the global crisis started: currency traders started selling Eastern European currencies in a panic, and lots of borrowers in those countries saw their monthly loan payments soar by as much as 50%. A lot of them defaulted (about 6-7%). Countries in which the share of foreign currency loans in their total credit market was the largest (such as Latvia with 90%, Hungary with 63% or Romania with about 60%) had to request assistance from the IMF to cope with the crash.

My question is: in the pre-crisis period, why were banks so excessively enthusiastic about giving out those loans? They must have known that a sudden large devaluing of local currencies would cause a huge wave of defaults. Were they simply counting on the fact that, if push came to shove, their debtors would be bailed out by the IMF and/or the EU? Take, for example, Poland, Hungary, Romania and Latvia. Their total domestic credit is $258 billion, $89 billion, $73 billion, and $29 billion, respectively; and the share of foreign currency loans in that is 35%, 63%, 60% and 90%. So the total amount of foreign currency loans is about $220 billion (and that's rounding way up, too). So assuming all those credit markets crash all at once with a catastrophic default rate of 10%, we'd see a hole of about $22 billion. That's not a lot of money, and it's a fair assumption to expect the IMF or ECB to step in and cover that.

Still, some of the banks operating in those countries have denominated close to 100% of their loans in non-local currencies. I don't really know much about finance; but does this sound like good risk management?