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Emergency Loans for European Banks

International development banks, concerned that financial and political turmoil in Eastern Europe could spread to Western Europe, are stepping in with billions of dollars in loans to buoy struggling banks and to unfreeze trade.

Emergency lending of about $30 billion was announced Feb. 27 by three banks: the World Bank Group, the London-based European Bank for Reconstruction & Development, and the European Investment Bank in Luxembourg. In addition, World Bank President Robert Zoellick has proposed a package of $25 billion in trade credits to help unlock frozen lending in Eastern Europe. And European leaders have suggested doubling the International Monetary Fund's lending resources to $500 billion to cope with the global crisis.

"This is a time for Europe to come together to ensure that the achievements of the last 20 years are not lost because of an economic crisis that is rapidly turning into a human crisis," Zoellick said in a statement.

Impending Debt Crisis

Western European banks are highly exposed to the turmoil in Central and Eastern Europe, with some estimates putting the total assets at risk at $1.25 trillion. Austria's loans to emerging markets, largely in Eastern Europe, for instance, are equivalent to about 80% of that country's gross domestic product. Looked at another way, Austria's Raiffeisenbank controls 21% of the banking market in both Bosnia-Herzegovina and Albania, 18% in Slovakia, and 16% in Montenegro. The governments of Iceland and Latvia collapsed because of the crisis, and riots have broken out in numerous European countries.

In a report this week, Standard & Poor's (which, like BusinessWeek, is a unit of the The McGraw-Hill Companies (MHP)), said growth in Eastern Europe is "shuddering to a halt." S&P said that some of the countries are "crumbling under the weight of high foreign currency debt," and that "all the ingredients of a major crisis are in place."

Lars Thunell, chief executive of the World Bank's International Finance Corp. arm, said in an interview that one problem is that Western European countries are looking out for their own banks, while leaving affiliates of those banks in Eastern Europe exposed. "They are using taxpayer money to benefit their own country," Thunell said. "It's important that you get the governments in Western Europe to look after their banks' operations in Eastern Europe. Because their economies since the [Berlin] Wall fell [in 1989] have become very integrated."

Emergency EU Session on Bailout

In response to the crisis, the IMF has lent billions of dollars to six European countries: Belarus, Hungary, Iceland, Latvia, Serbia, and Ukraine. Critics have accused the European Union of doing too little to contain building turbulence in the region, but on Mar. 1 the EU will meet in emergency session to discuss, among other topics, a common financial bailout of European banks. Hungarian Prime Minister Ferenc Gyurcsany told Bloomberg News that he is asking the EU for $230 billion to stabilize the currencies and economies of Eastern Europe.

IMF Managing Director Dominique Strauss-Kahn said the loans announced Feb. 27 "will help mitigate the effects of the financial crisis on credit flows in the region. The joint efforts under this initiative will assist individual financial institutions and sectors, while IMF lending will continue to support countries at the macroeconomic level."

The package includes $9.5 billion from the World Bank, $13.9 billion from the European Investment Bank, and $6 billion from the European Bank for Reconstruction & Development.

LeVine is a correspondent in BusinessWeek's Washington bureau.

LeVine is a correspondent in BusinessWeek's Washington bureau.

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