Big, Big News: World Bank’s action on Europe reflects fear of another global meltdown
The World Bank is moving to prop up the European banking system in response to the crisis in the region, echoing the steps it took during the 2008 world crisis and reflecting heightening fear that the euro’s problems are starting to crimp the global economy.
The bank’s focus, as it was in 2008, will be to keep nations in eastern Europe’s developing markets and central Asia from bearing the brunt of an outside crisis. This time, a likely euro area recession and new euro area banking rules are threatening a retreat by western European banks trying to strengthen their financial position at home.
The amount of money committed — $27 billion — is modest in comparison to the multitrillion-dollar war chest that the International Monetary Fund says is needed to fight the crisis.
But it is a significant sign that the euro zone’s problems are infecting other countries through depressed trade and investment. Analysts worry particularly about eastern Europe, which is heavily dependent on the flow of capital and financial help from its western neighbors.
Money from the World Bank will be funneled through a variety of bank programs, but the main aim will be to ensure that the financial systems in eastern Europe don’t fall because of decisions made by bankers in Paris, Rome or Frankfurt.
In a press release Wednesday morning, the bank said the money would be used to help ensure that credit continues flowing, particularly to small and medium-sized businesses, as support for banking systems buffeted by the euro’s troubles, and to ensure governments can sustain “protection of the most vulnerable.”
The bank said it was also working with other organizations in the region to “encourage Western European banks to stay in Eastern Europe” and not pull back from the region. Details were not immediately available.
Analysts at the IMF and elsewhere are concerned that new regulations meant to strengthen euro area banks are encouraging the continent’s main financial institutions to reduce investment and lending — which may fall most heavily on eastern European countries.