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Europe's financial crisis is spreading eastward

Hungary and Ukraine received emergency loans from the IMF Sunday. Belarus and Serbia are asking for help, too.

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"No matter how well your economy is doing you will have problems as soon as you have debt and are not able to refinance it," says Vasily Astrov, an expert in the region's economies at the Vienna Institute for International Economic Studies.

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Why Western Europe is worried

In many cases, the loans Western European banks have made to Eastern European customers for mortgages were made in foreign currencies – euros, dollars, Swiss francs, and others – at substantially lower interest rates than they would have received in their own currencies, which were strengthening rapidly.

That wasn't a problem, as long as those Eastern European currencies remained strong, says Katinka Barysch, the chief economist at the Center for European Reform in London.

"But now these currencies are under pressure," Ms. Barysch says, "and you will really struggle to service your mortgage if the value of your own salary is collapsing vis a vis your mortgage payments in Swiss francs or euros."

For example, if a Hungarian had a home mortgage payment of €300 per month, that's equivalent to 73,200 forints. If the forint drops 11 percent against the euro, that means his monthly mortgage bill goes up to 81,300 forints. But his salary, in forints, doesn't increase.

Eastern European countries currently hold about $1.6 trillion in foreign currency debt, according to Morgan Stanley, and it's overwhelmingly owed to Western Europe, whose large banks own 60 to 80 percent of Eastern Europe's banking sector.

Western Europe is among the world's most exposed regions to debt from emerging markets, not just in Eastern Europe but in Latin America and Africa. While exposure to emerging markets accounts for about 4 percent of the USs' gross domestic product, in countries like Switzerland it's as high as 50 percent, according to the Bank for International Settlements.

The concern in Western Europe now is whether Eastern European countries will begin defaulting on those loans.

Not all Eastern European countries are struggling for the same reasons.

Ukraine has been hit hard by sharply falling commodity prices, especially for steel, an major export. The Baltics are seeing a housing bubbles burst. The Czech Republic, Slovakia, and, to a lesser extent, Poland are in better shape because their economies are considerably more export-driven, which reduces the need for borrowing.

Those three countries also chose to keep their currencies floating, rather than fixed, against the euro, which gives them a degree of flexibility when the euro heads south. They can devalue their own currencies as an offset, which helps exports.

A rush to adopt the euro?

Eastern Europe's woes are sparking a fresh debate about the wisdom of pegging currencies to the euro. Economists predict that a currency crisis will drive more countries to adopt the euro, citing the safety net against currency runs. Iceland, Sweden, and Denmark are weighing this. Poland is now planning a referendum on euro adoption next spring. In January, Slovakia will formally adopt the euro, the first ex-Soviet bloc country to do so.

"If that goes through without trouble, it will be an extremely important sign for other countries," says Daniel Gros, director of the Center for European Policy Studies in Brussels. "If you want to be safe, you better be in the euro zone."

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