Financial crises are often followed by political polarization and increased support for populist parties. Many crises involve significant household financial distress, especially among debtors. Győző Gyöngyösi from the Leibniz Institute for Financial Research SAFE, and his co-author Emil Verner from the Massachusetts Institute of Technology (MIT) investigate in their research paper, “Financial Crisis, Creditor-Debtor Conflict, and Populism”, published in the Journal of Finance, how debtor distress affects support for the far-right populist Jobbik party in the wake of the 2008 Hungarian household debt crisis when its vote shares increased from 2.6 percent to 16 percent.
“Our results show that household financial distress leads to a significant and persistent increase in support for a populist far-right party,” says Gyöngyösi, adding: “Populist political movements, in turn, may emphasize debt relief for distressed borrowers as part of their political platform.”
To establish a causal relationship between household debt shock and voting for a populist party, the authors use widespread household Swiss franc borrowing with a large and unanticipated depreciation of the domestic currency. The currency crisis unfolding in 2008 increased the loan payments of household borrowing in foreign currency but not of households borrowing in the local currency. The authors exploit that variation in foreign currency debt exposure is driven by a policy change that cut back an interest rate subsidy program for local currency mortgage loans.
Attracting votes by pro-debtor rhetoric
Combining administrative household credit registry data and election outcomes, the authors find that the household foreign currency debt shock significantly increases the populist far-right vote share, an effect that is persistent across several post-crisis elections.
In order to understand why distressed debtors voted for a populist party, the authors complement their primary analysis by presenting additional narrative evidence. Textual analysis of parliamentary speeches reveals that far-right speeches were more likely to use debtor-friendly rhetoric, emphasize debt relief, and blame international banks, the International Monetary Fund, and establishment parties for foreign currency debtors’ financial distress. Populists’ debtor-friendly stance fits with its broader (rhetorical) claim to speak for “the people;” and against “the elite”, “the bankers”, and “international finance capitalism”.