FRANKFURT (Reuters) – 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 task force 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 task force, 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. «This can imply major vulnerability in the event of a financial crisis. Experience has shown that, while currency mismatches tend not to precipitate financial crises, they can play a major role in exacerbating them and making them very costly to resolve, with taxpayers often bearing most of the cleanup costs,» the report continued. A sudden fall in the local currency could inflate debt and interest payments and lead to bankruptcies and a deterioration in bank balance sheets, making the crisis worse. «A vicious cycle of this kind was a key factor behind the severity of the Asian financial crisis of 1997-98,» the report said. In Romania, 54 percent of loans to businesses and households were in foreign currencies and in Bulgaria it was 47 percent. Turkey and Croatia were lower down the scale at 16 percent and 10 percent respectively. But efforts by central banks to curb local banks’ foreign-exchange lending were unlikely to be successful in the long term, as borrowers would find ways to get credit direct from abroad, or through local non-banks like leasing companies. European central banks commissioned the task force to produce a report on macroeconomic and financial stability challenges in aspiring EU countries in October last year. The report does not necessarily reflect the views of the ECB itself.