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, increasing risk to the global financial system that could well affect the United States.
"There's a domino effect," Harvard professor and former chief economist for the International Monetary Fund Ken Rogoff told The New York Times.
"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."
Many of the largest banks in France, Britain, Germany, and Spain have cut back on lending because their economies are in recession.
Because loans from these banks fueled Eastern Europe’s economic growth in large part, such credit-tightening is exacerbating damage already done by the global downturn.
Average growth among Eastern European countries in the region dropped from 5.4 percent in 2007 to 3.2 percent last year and is expected to fall by at least another 0.4 percent this year.
Analysts worry that countries in this region will be unable to repay their existing loans as their currencies lose value, since their loans were made in stronger Western currencies.
Last week, a report from Moody’s Investors Service warned that Western owners of East European banks are coming under pressure to withdraw their capital.
Moody’s said the countries most at risk are the Balkan countries, Hungary, Croatia, and Romania.
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