Since the fall of the Berlin Wall, the countries of Eastern Europe have emerged as critical allies of the United States in the region, embracing American-style capitalism and borrowing heavily from Western European banks to finance their rise. Now the bill is coming due.
The development boom that turned Poland, Hungary and other former Soviet satellites into some of Europe’s hottest markets is on the verge of going bust, raising worrisome new risks for the global financial system that may ricochet back to the United States.
Last week, Wall Street plunged after Moody’s Investors Service warned that Western banks that had recently beat a path to Eastern Europe’s doorstep now faced “hard landings,” spooking investors with new fears that the exposure could spread beyond Europe’s shores.
“There’s a domino effect,” said Kenneth S. Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. “International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.”
The danger is on several fronts. The big European economies, including Britain, France, Germany and Spain, are already in recession, and many of their largest banks have curbed lending at home and abroad.
For Central and Eastern Europe, which enjoyed breakneck growth thanks to a wave of credit from these banks, the squeeze could not have come at a worse time. Already bruised by the global downturn, they are on the verge of a downward spiral as the flow of credit dries up. Average growth among countries in the region slid to 3.2 percent last year, from 5.4 percent in 2007. This year, it is forecast to contract by 0.4 percent — and very likely more.