The Financial Fix That Saved Eastern Europe

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The crisis also demonstrated that the Western European banks that dominate financial services in the region were on firmer footing than some economists feared. One oft-quoted figure was that lending by Austrian banks in Eastern Europe equaled up to 80% of the country's gross domestic product. The implication was that exposure to the region could cripple Austria. Overlooked was the fact that some two-thirds of lending by Austrian bank subsidiaries in the region is funded by local depositors. In Slovakia, for example, deposits by Erste Group's (ERST.F) local customers exceed the amount the bank has loaned out. "Subprime is not what we're doing" in the region, says Erste Chief Risk Officer Bernhard Spalt. "We are doing a very boring plain-vanilla retail business."

Troubled Governments

Eastern Europe also has benefited from massive financial largesse. In addition to the IMF, institutions such as the EBRD and European Investment Bank pumped money into the region. For example, the EBRD lent $639 million to UniCredit subsidiaries so they could in turn step up lending to Eastern European customers. The EBRD also lent directly to businesses in the region. Examples range from $1.5 million to finance expansion by a Macedonian cheese producer to $296 million to build a gas storage facility in Hungary.

Yet it would be premature to sound the all-clear. Latvians, who took to the streets early in 2009, remain restive as the government makes draconian budget cuts to avoid currency devaluation. The Ukrainian government remains dysfunctional, with continuous feuding between Prime Minister Yulia Timoshenko and President Viktor Yushenko. "In a country with 46 million people, this [is] a very alarming situation," reports one senior banker who visited Ukraine at the height of the crisis and asked not to be identified. Hungary, once one of Eastern Europe's great success stories, is still trying to dig itself out of debt.

Citizens of Central and Eastern European countries will feel the effects of the crisis for months and years. Unemployment may continue to rise and so will loan defaults. "The pain ordinary people will feel through unemployment or reduced income or higher taxes—probably most of that still lies ahead," says Thomas Mirow, president of the EBRD. Adds Mary Stokes, an analyst at New York-based global economy watcher RGE Monitor: "Even as economies recover, there are still skeletons in the closet."

Ewing is BusinessWeek's European regional editor.

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