New Europe Catches Old Europe’s Cold

LONDON – As governments across Western Europe began bailing out banks and their depositors, Eastern Europeans watched nervously, unsure about what the global financial storm would mean for them. Now that the storm has hit, the fragile bonds of European solidarity are being tested.

Two countries – Hungary and Ukraine – have already asked for large packages of support. Several more could do so over the next month if frozen credit markets do not thaw. If the situation continues until the end of the year, which cannot be ruled out, many more countries could experience serious banking crises.

Over the last two decades, Eastern Europe has undertaken wide-ranging reforms and embraced global financial integration. Foreign, mostly European, banks have entered these markets with unprecedented speed and force. These banks have increasingly reached out to more risky small- and medium-sized enterprises and helped people buy their own houses and start new businesses. But successful financial development is now coming back to haunt these countries.

Until now, the countries of emerging Europe withstood the global financial squeeze remarkably well, coping with the slowdown in important export markets and increased borrowing costs. But no open economy can resist a complete shutdown of the lending markets. Perhaps they became too dependent on cheap credit, but they were not alone in this respect.