As a rule, middle-class societies newly liberated from dictatorship generally go on a credit binge that ends in tears. It's like giving a released prisoner a limitless credit card -- a spending spree is sure to ensue. That's what happened in Asia and Latin America in the past, and what more recently happened in the former "Eastern Bloc" nations of Europe.
Unlike past examples, however, the credit binge in Eastern Europe has been in foreign currencies, with Western European banks or their subsidiaries extending most of the foreign credit. In 2007, private-sector foreign currency equalled 126% of foreign-exchange reserves in Eastern European countries. And in 2008, the region's banking system borrowed an additional $100 billion.
The European Union's (EU) decision earlier this month not to provide a massive, 180 billion euro bailout to Eastern European banks made headlines around the world. But that doesn't mean the richer nations of the eurozone have abandoned their poorer neighbors to the east. Instead of handing over billions to bankers who made terribly poor decisions, as the U.S. Treasury has done in America, each bailout will be considered on a case-by-case basis, and each will be subject to strict "conditionalities" similar to those imposed in any IMF agreement.
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