Outlook Eastern Europe is the latest shoe to drop in the credit crisis. It's been bubbling up for ages, but exploded fully into the open this week when Moody's warned that it might downgrade the credit ratings of Western banks active in eastern Europe and the former Soviet bloc. Austrian banks are particularly heavily exposed.
It's the same old story. Soaraway growth in these emerging-market economies seems to have owed more to the credit bubble than their innate attractions as places to invest. Lending to eastern Europe by foreign banks has risen threefold in the three years since 2005. The great bulk of this lending was in euros and dollars. Much of it has to be refinanced over the next year at a time when local currencies are sliding and the lenders are attempting tightly to restrict credit to their own home markets.
The crisis looks worse for emerging markets which are outside the European Union than those already in it. Accession nations such as Poland are desperately trying to accelerate plans to join the euro in the hope that this might offer some protection from the storm. For those completely outside, the situation looks dire. One way or another, both the sovereign nations and many of the banks that lent excessively to them are going to have to be bailed out. Europe needs to move urgently to address this problem. Having encouraged and welcomed free market reform in these former communist states, it is imperative they now get the support to complete the transition.