The Spread of the Financial Crisis to Central and Eastern Europe: Evidence from the BIS Data

Abstract

Like other emerging markets, central and eastern European (CEE) economies weathered the financial crisis relatively well for over a year after it had started in major financial centres in August 2007. Growth and capital inflows were generally strong and financial markets for the most part performed well. But, starting in October 2008, the region got increasingly sucked into the global financial and economic maelstrom. As credit markets around the globe became dysfunctional in the aftermath of the collapse of Lehman Brothers, there was heavy and at times indiscriminate selling of emerging market assets, including CEE equities and bonds. There were also widespread expectations of a sudden stop in cross-border bank flows, drawing on the experience from previous emerging market crises. CEE appeared particularly vulnerable because it had financed its long expansion since 2002 to a major extent with foreign bank loans, which over time resulted in large external and internal imbalances in many countries. These vulnerabilities were starkly exposed in a bout of severe financial turmoil in February 2009, when it seemed likely that the CEE region would become another sad case in a long series of emerging market crises.