The Financial Fix That Saved Eastern Europe

The little-known Vienna Initiative helped stave off a bank meltdown in Central and Eastern Europe. But the region isn't out of the woods yet

By Jack Ewing

Traffic moves through the city of Warsaw, Poland Chris Jackson/Getty Images

Eastern Europe, which narrowly escaped financial meltdown early in the year, is looking wobbly again. The International Monetary Fund has delayed aid to Romania amid political turmoil. Hard-pressed Latvia is trying to avert a sharp devaluation of its currency. And Ukrainian leaders are backstabbing each other as energetically as ever.

A crisis in any of these countries once could have sent Eastern Europe into a tailspin. Yet in contrast to early 2009, there is little fear that foreign investors will flee en masse or that dozens of banks in the region will fail. What changed? The rebound of the global economy helps, of course. But part of the explanation can be found in a modern building on Mariahilfer Strasse in downtown Vienna. There, on Mar. 26 of this year, at an institute normally used to teach Eastern European bureaucrats about market economics, roughly 40 bankers and public officials gathered to find a way to avert a regional financial disaster that could have had global implications.

The meeting attracted more people than organizers expected, and the small classroom quickly grew uncomfortably warm. The tone was businesslike, but stress and overwork showed on the faces of the participants as they sat shoulder to shoulder around a large U-shaped table. "There was an enormous amount of uncertainty. People were really afraid to think beyond the next two or three weeks," recalls Anne-Marie Gulde, a senior adviser in the IMF's European Dept. who attended the sessions.

"A Very Real Risk"

By the end of the day, participants had launched a rescue effort known as the Vienna Initiative that continues to underpin Eastern Europe's banking system. In subsequent months the IMF, with financial backing from the European Union, pumped $78 billion into Eastern Europe to stabilize national economies. In return, Western European banks operating in the region, such as Italy's UniCredit (CRDI.MI) and Vienna-based Raiffeisen International (RIBH.F) agreed to continue supporting their Eastern European subsidiaries.

The actions averted widespread bank failure that could have fed a disaster as big as the Asian financial crisis in the late 1990s. "It was a very real risk," says Erik Berglof, chief economist for the European Bank for Reconstruction & Development (EBRD). If one bank had panicked and withdrawn support for its subsidiaries, "that would be a trigger for a complete run for the exits."

Managers of banks in the region deny that they ever considered pulling out, but they agree the situation was grave. "It was clear after the collapse of Lehman Brothers that if we managers of systemic banks didn't take the future in our hands, then we might have run into serious troubles in Central and Eastern Europe," says Herbert Stepic, chief executive of Raiffeisen, the second-largest bank in Central and Eastern Europe after UniCredit.

Unsung Midlevel Heroes

The success of the Vienna Initiative was a minor miracle, largely overlooked amid bigger crises in the U.S., Western Europe, and China. The rescue attracted scant notice in part because it was the work largely of midlevel officials, such as the IMF's Gulde, who are little known outside their own fields. The Western European heads of state, the Central Bank presidents, and the high-profile investment bankers were too busy trying to save the global banking system.

Yet Eastern Europe owes its salvation to people like Thomas Wieser, a civil servant in the Austrian Finance Ministry.

Business Exchange

Track and share business topics across the Web.